2018, On More Markets...

When I used to be an equity analyst (sounds like the beginning of a fairy tale), the most difficult part of my life was coverage. There were just too many stocks, there was this little brain of me and a limited understanding of how things work. The good thing about quantitative research is that it is like a software product. You can create a module and then plug and play in different markets. It is so easy. It is, isn’t it? I think it is.

Last year was a breakthrough for me in trying out different ways of implementing quantitative strategies. It is not that I was not doing it earlier. The issue was to do with implementation and rules. It is like this. Say for example, you are running a mid cap strategy. What if a stock that you selected does well and becomes a large cap stock? As per general rules of indexing or passive investing or rule-based trading, you would let go of the stock. But why would you do that? Is the reason only it moving from one size segment to another? But that is stupid.

So the new approach says that you hold it till it fulfils all other criteria and ideally, it should be preferred over other stocks. It is like not attempting a question in the examination even if you know the solution, only because it was not in the ‘prescribed syllabus’. There are no such rules in the market. Or better still, you make those rules in the market. And if it works, it works.

Going back to the topic of GARP investing, 2018 was a challenging year more so because growth as a factor did not fare well. The main reason was that most investors globally were looking for safety stocks and in spite of the low valuation as compared to their growth rates, GARP stocks did not provide that kind of comfort to the investor. Therefore, the focus was on less volatile stocks. The focus was more on preserving your returns from the previous year rather than losing it on your chosen strategy.

Further on that, I tried to run similar strategies in other markets. Till now, I have attempted US, Japan and China. I have been looking to do more but for each of these new markets, I have to go back and clean the underlying data and all this in the middle of the normal work that I continue doing. Some part laziness, some part a paucity of time.

From the numbers, it works fairly well for India, China or USA but not so much for Japan. It makes sense because Japan has not been a growth market for ages. Even momentum doesn’t work there well. It is understandable. Frankly, I would be scared exploring many strategies in Japan. It works so well for emerging markets because growth as a factor works much better, or it used to be much better in pre-GFC periods than it is now.

PS: I have not updated my dataset for China. I will add a bit more on that later. And I will step back from GARPing for a bit and explore other strategies.