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MOSL: India Strategy-Contrarian Investing – Quarterly Update-A review of our contrarian investment strategies

India Strategy: Contrarian Investing – Quarterly Update; A review of our contrarian investment strategies

 

Our thematic strategy note on – published in June’17 – provides a detailed account of the subject matter. In this note, we have reviewed the performance of our strategies, presenting our key findings and top contrarian bets. Since we have used the quarterly rebalancing method to test our hypothesis, we run the updated quintiles as on 31st Dec’18.

Key takeaways from our analysis

• Neutral-to-moderately popular stocks outperform significantly, even when compared to the most popular stocks. In 3QFY19, the quintile encompassing neutral-to-moderately popular stocks performed the best, significantly surpassing the performance of the benchmark (BSE-100). The most popular stocks came in third, while the second-most popular stocks performed the worst.
• Out-of-favor low P/E stocks deliver disproportionate returns, significantly outperforming the benchmark. In contrast, the performance of high P/E stocks is dismal. In 3QFY19, low P/E stocks delivered the best returns, while the high P/E quintile came in second last.
• Similarly, out-of-favor low P/CF stocks deliver disproportionate returns, again significantly outperforming the benchmark. In contrast, the performance of high P/CF stocks is dismal. In 3QFY19, high P/CF stocks delivered the best returns, while the low P/CF quintile came in third.
• In some sub-themes, the returns from a quintile deviate from the long-term pattern, as highlighted in our initial detailed note. However, this is in line with the trends observed even in the long-term study – where returns can deviate for a quarter, but the hypothesis is proven right over a long period. For example, in the ‘price to cash flow’ theme, instead of Quintile-5, Quintile-1 delivered the best returns in 3QFY19 but has been the worst performing quintile over the last decade.