A-Share Industry Rotation Using Momentum and Economic Regimes

Summary

This document explains industry rotation as a strategy that shifts equity exposure toward sectors showing stronger performance and may reduce equity holdings when conditions look unfavorable. It discusses possible drivers, including economic cycles, policy, fundamentals, and investor behavior. It also outlines the Merrill-style growth and inflation framework for relating economic regimes to asset classes and stock sectors, while offering examples of cyclical and defensive industries.

The practical example ranks industry indexes using weighted returns across different periods, then selects the five largest companies in the strongest industry. The document also describes sector momentum and sector variables in return prediction models. It cites prior research on momentum and reversal patterns, but provides no new backtest results or precise implementation parameters. It cautions that results may be vulnerable to overfitting, high turnover and trading costs, and changing market conditions; the macro-to-sector relationships are presented as general tendencies rather than guaranteed rules.

Key ideas

• Industry rotation shifts exposure among sectors as relative performance and economic conditions change.
• The document links growth and inflation regimes with different preferred asset classes and sector styles.
• One proposed method ranks industry indexes by weighted returns across multiple periods.
• The example selects the largest companies within the strongest-ranked industry.
• Overfitting, turnover costs, and instability in momentum effects can undermine performance.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.