For the first time since 2003, many high momentum stocks are actually cheaper than those with low momentum, Morgan Stanley says.
When it comes to investing in the ASX, the broker's analysis shows that one of the most reliable indicators is whether a stock has risen in the past.
![Stocks including BHP, South32, Origin Energy, Bluescope Steel, Whitehaven Coal and ANZ are among the top ASX stocks by ...](/web/20170225104401im_/http://www.smh.com.au/content/dam/images/g/s/m/7/1/a/image.related.articleLeadwide.620x349.gugk9y.png/1487578754221.jpg)
So-called "momentum" investing is usually expensive, but some of the ASX stocks with the most momentum are going cheap – a rare event that last occurred in 2003.
Stocks including BHP, South32, Origin Energy, Bluescope Steel, Whitehaven Coal and ANZ are among the top ASX stocks by price growth in the past year.
But on a price-to-book ratio basis, they're far cheaper to buy than many stocks whose share prices haven't risen much at all over the past 12 months, such as Telstra, APA Group, Flight Centre, Brambles and Transurban.
BHP Billiton, for example, has a price-to-book ratio of 2, and its price has risen 75 per cent in the past year. Similarly, ANZ's share price is up 39 per cent year-on-year, but its price-to-book ratio is only 1.5 per cent.
On the other side of the ledger, Telstra's price has risen just 1 per cent, but its price-to-book ratio is 3.8, making it relatively more expensive than every single one of the best momentum stocks identified by Morgan Stanley. Vitamins company Blackmores has a price-to-book ratio of 11.6, but its price has declined 25 per cent.
The analysis, by a team of Morgan Stanley analysts led by equity strategist Stephen Ye, follows earlier research from the financial services firm that identified momentum analysis as the best quantitative strategy for investing in the Australian share market over the past 20 years, beating out strategies such as value investing, growth investing or investing based on what stocks are cheap on a price-to-book ratio (without reference to recent momentum).
Momentum investing was a better guide to decision making in Australia than it was anywhere else in the world. The strategy, Morgan Stanley's analysts concluded, doesn't work well in Japan, and works less well in Canada and the United States.
Normally, Morgan Stanley noted, the difference between the 20 per cent of stocks with the best and the 20 per cent with the worst momentum has since 1990 been, on average, a 37 per cent book-to-market spread.
"Very rarely does the book-to-market spread turn positive, but due to increasing composition of deep value resources within momentum, momentum is now actually cheap," Mr Ye wrote.
One of the challenges of momentum investment is timing an entry into the market. Morgan Stanley's analysts noted that periods of low price-to-book ratios in momentum stocks had previously been found to be a good signal for timing entry into the market using momentum investment in the past, particularly in the Asia Pacific region.
The firm's analysts also noted the daily volatility in momentum stocks had been below average and falling, seen as another positive signal for the factor
Last year was a historically weak year for momentum investing, in which those who followed the strategy would have seen below-average returns. "2016 was a rare year of underperformance," Morgan Stanley's analysis noted.
Credit Suisse Australian equity strategist Hasan Tevfik previously noted the momentum strategy "can perform horrendously around turning points", of which 2016 was one.