Following momentum in the lucky country

Momentum strategies are currently exceptionally popular in Australia and have been successful here for a long time. Momentum strategies involve buying yesterday’s winners and selling yesterday’s losers. By nature, they are designed to pick up trends across markets and sectors.

In early 2025, momentum strategies are adding significant value in Australia – indeed more so than in any other peer market. To many investors, this is a rather stark observation – though, in historical terms, it is perhaps not that unusual. After all, looking over the past few decades, the outperformance of momentum strategies in Australia is an order of magnitude greater than anywhere else in the world.

Part of the reason for this is that the Australian market is highly concentrated among a few major sectors, with each of these sectors taking its turn to experience super-cycles. For example, during the 1990s, banks outperformed on deregulation, whereas in the 2000s, the resources sectored led on the rise of China.

More recently, we have seen resources underperform due to negative demographic and housing trends in China, while banks have been bid up as a haven given their exposure to stable Australian growth, supported by multiple policy levers. The ability of Australian momentum factors to successfully pick the winning and losing sectors is worth emphasising. Indeed, over the past few decades, we note that running momentum strategies on an unconstrained basis performs much better than running them on a sector-neutral basis (where winners and losers are selected within the same sector as opposed to from the broader investable universe). 

Chart 1: Global momentum strategy returns in 2025

Chart 2: Global momentum strategy returns since 2005

Chart 3: Australian momentum strategy returns: unconstrained versus sector neutral 

Having said this, we should not confuse structural and cyclical outperformance of Australian momentum strategies. Most of the outperformance of Australian momentum relative to global momentum arises because: (a) momentum strategies globally generally adding value; and (b) Australian momentum strategies are high-beta, or cyclical, expressions of global momentum strategies. When we break down strategy returns into 12-month periods, we see that periods of exceptional Australian momentum performance relative to peers are usually followed by periods of stark underperformance relative to peers in the subsequent years. Indeed, looking at the data from the past two decades, we note that three out of four times when Australian momentum returns have outstripped the best of peers, they have later converged to among the worst of peers. Given how strongly momentum is performing in Australia at the moment, it is worth noting this historical pattern, because it suggests a 75 per cent chance that momentum will underperform markedly in the period ahead. It is also worth highlighting that Australian momentum is currently moving against the grain, because in peer markets, momentum strategy returns appear to be slowing.

 Chart 4: Year-ended Australian momentum strategy returns in a global context

In summary, momentum investing is a highly successful strategy to employ in Australia. However, it is important to not confuse the cyclical and structural aspects of this track record. If global momentum underperforms, Australia is rarely insulated for very long. This makes intuitive sense given that Australia is a small open economy and heavily exposed to global forces.