Momentum Investing in International Markets

Momentum as an investing factor—the tendency for past winners to outperform past losers over medium horizons—persists in developed-market equities outside the US and in emerging markets, but its strength and consistency vary by region. Currency fluctuations, trading liquidity, and differences in disclosure standards all shape whether international momentum strategies deliver the same risk-adjusted returns as their US counterparts.

Does Momentum Work Outside the US?

Academic research confirms momentum effects across most developed markets: the UK, Japan, Germany, France, and Australia all show 3- to 12-month price momentum. A stock that outperformed its peers over the past 6 months tends to keep outperforming over the next 3 to 6 months.

The magnitude varies. In the US, momentum has historically delivered 8–12% annualized outperformance for portfolios ranked on prior 6-month or 12-month returns. In developed Europe or Japan, the effect is typically 4–8% annualized. In emerging markets (India, Brazil, Mexico, Korea), momentum shows up but is noisier and sometimes weaker.

Why the variation? Market structure, investor base composition, and information diffusion differ by region. The US equity market is the most efficient globally—information incorporates quickly, and arbitrage is swift. Smaller markets have pockets of inefficiency where momentum persists longer.

Currency as a Confound and Opportunity

An international momentum strategy faces a key decision: hedge currency risk or leave it unhedged.

An unhedged international momentum portfolio returns depend on both stock price momentum and currency momentum. If a Japanese stock gains 15% in yen terms but the yen falls 10% against the dollar, a US investor sees only a 3% return. Currency movements can swamp stock momentum, especially in volatile periods.

Currency momentum itself is real: the yen, euro, and emerging-market currencies exhibit directional trends. An investor taking unhedged positions in momentum stocks in appreciating currencies benefits doubly; one in depreciating currencies loses doubly.

Hedged momentum isolates stock-price momentum from currency moves. A fund buying Japanese stocks and simultaneously selling yen forward (a currency hedge) captures pure stock momentum at the cost of the forward premium (the interest-rate differential between currencies). In a 2% JPY forward premium, the hedge costs approximately 2% annualized.

Most institutional investors use hedged momentum to focus on stock selection. Retail investors often leave currency unhedged—inadvertently taking an additional currency bet.

Liquidity and Slippage Drag

International equity markets vary sharply in liquidity. The main indices of the UK, Germany, France, and Japan are deep and tight. But mid-cap and small-cap stocks, especially in emerging markets, can have wide bid-ask spreads and low trading volume.

Momentum strategies require frequent rebalancing: typically monthly or quarterly turnover to maintain the portfolio’s exposure to the highest-momentum stocks. In US markets, rebalancing costs are low—typically 5–20 basis points. In emerging markets, rebalancing can cost 50–150 basis points, substantially eroding the momentum premium.

A 6% momentum premium before costs becomes 4% or less after trading costs, and the strategy becomes marginal.

Data Quality and Survivorship Bias

Momentum studies of international markets face data challenges absent in the US. The US equity market has nearly 100 years of standardized, comprehensive data. International data is patchier.

Survivorship bias—the exclusion of delisted or bankrupt stocks from historical returns—inflates momentum returns in academic studies. A stock that crashed after a momentum run-up may not appear in the sample, overstating how often momentum worked. Emerging markets, with higher failure rates, suffer more from this bias.

Recent academic research using careful data handling shows international momentum is real but more modest than earlier studies suggested—perhaps 50% of the size of the US effect.

Regional Differences

Developed markets (Europe, Japan, Australia): Momentum is consistent and stable, resembling the US pattern. 6-month or 12-month lookback windows work; reversals kick in at longer horizons (18+ months). Liquidity is good enough to support passive tracking of momentum factors.

Emerging markets (China, India, Brazil, Mexico, Russia, Korea): Momentum is present but volatile. Shorter lookback periods (3–6 months) sometimes outperform longer ones, reversing the developed-market pattern. Returns are higher but more subject to drawdowns. Liquidity is thinner, particularly outside the largest-cap stocks. Political and financial instability add regime shifts not seen in developed markets.

Frontier markets (Vietnam, Thailand, Nigeria, Kenya): Momentum is harder to detect and likely illusory after costs. Data is poor, survivorship bias is high, and liquidity is severely limited. Most institutional investors avoid dedicated momentum strategies in frontier markets.

Currency Momentum as a Distinct Signal

Some momentum strategies deliberately exploit currency momentum—betting that strong-performing currencies will keep strengthening. This works differently from stock momentum and can be combined or run separately.

A portfolio that buys momentum stocks in momentum currencies (both trending upward) can amplify returns or hedge away currency drag. But it requires active currency views or systematic currency-trend tracking, adding complexity.

Sector and Style Variations

Momentum effects are not uniform across all sectors. In developed markets, it works across sectors but is strongest in discretionary, tech, and growth stocks—stocks already prone to trend-following. In emerging markets, momentum in financials and commodities can be weaker, reflecting the dependency of those sectors on macro cycles rather than price trends.

Value stocks (low price-to-book) exhibit weaker momentum than growth stocks globally. This makes blended strategies (momentum + value) trickier internationally—value’s mean reversion can fight momentum’s trend-following.

Practical Implementation

Investors typically access international momentum through:

1. Dedicated momentum ETFs (e.g., iShares MSCI EAFE Momentum Factor ETF): Simple, low-cost access to developed-market momentum outside the US. Currency exposure is typically unhedged.

2. Quantitative multi-factor funds: Momentum combined with value, quality, and volatility. Reduces concentration risk but dilutes the momentum premium.

3. Active momentum managers: Hedge funds and asset managers running systematic momentum strategies, often with currency overlays and cost management in mind. Higher fees but more sophistication on liquidity and rebalancing.

4. Custom strategy: Building a momentum ranking (e.g., 6-month returns, ranked deciles) on your chosen universe, then rebalancing quarterly. Feasible for investors with large capital bases and tolerance for operational overhead.

Performance Comparison: US vs. International

Over the past 20 years, US equity momentum has significantly outperformed international momentum. This partly reflects US tech dominance (FAANG stocks exhibited strong momentum), but also the generally higher efficiency and lower-cost implementation in the US market. An international momentum strategy holding back to the US often shows higher risk-adjusted returns.

For a truly diversified momentum exposure, combining US momentum with developed-market and selective emerging-market momentum—weighted by liquidity and net of costs—offers geographic spread at the cost of complexity.

Regime Sensitivity

Momentum breaks down during market dislocations. In 2008, March 2020, and other crisis windows, momentum portfolios collapsed—past winners crashed fastest. This is a consistent global phenomenon: momentum is a pro-cyclical strategy that adds risk in downturns.

International momentum suffers more acutely because emerging-market and less-liquid developed-market stocks experience sharper drawdowns in panics. Adding international momentum to a portfolio increases tail risk.

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