Morgan Stanley: Asia Quantitative Outlook — Can the Momentum Rally Sustain? Cautious on China, Constructive on ex-China
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Morgan Stanley's Asia quantitative research team examines whether the strong momentum-driven rally across regional equities can persist. Asian stocks opened 2026 robustly, with the MSCI Asia Pacific (ex-Japan) index gaining 5.7% through January 23. South Korea (+18.6%) and Taiwan (+10.8%) led, while India (-6.3%) and Indonesia (-1.4%) lagged. However, market breadth has narrowed sharply: just three names — TSMC, Samsung Electronics, and Alibaba — contributed 63% of total index returns. The effective constituent count stands at only 42 out of 1,059, pushing concentration to historic highs.
The price momentum factor returned 11.7% regionally, outperforming all other factors. In China, momentum gained 9.3%, driven primarily by net long positions in materials and IT. In ex-China markets, momentum rose 14.6%, supported by long positions in industrials and IT alongside shorts in consumer staples and healthcare.
Critically, Chinese momentum shows diverging behavior: non-neutral versus sector-neutral momentum are decoupling, with the latter appearing to peak, signaling weakening intra-sector stock-picking alpha. Conversely, ex-China momentum looks healthier, supported by both sector-level and intra-sector leadership. The report warns that China's momentum factor faces elevated reversal risk amid macro and geopolitical uncertainties, while ex-China momentum appears more durable.