Trend Following in Equities

The trend is my friend, right?

May 2023 Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Long-only trend following in equities was more effective than long-short trend following in the US
  • Same for European and Asian stock markets
  • Perhaps explained by the negative skewness of stock markets


Imagine a world where economic growth is anemic. Governments and central banks do everything to stimulate growth, but their powers have weakened over time to the extent that even the most extreme fiscal and monetary policies have only a short-lived impact.

Although such a scenario sounds utterly depressing, it is difficult not to see that we are on its trajectory. Economic growth is a function of productivity and the working-age population. Despite all the technological innovation, productivity has not increased in most developed countries over the last decade. And demographics are poor across developed and emerging markets, eg China is expected to lose 400 million people over the next 80 years (read Aging & Equities: Selling Stocks for the Long-Term).

How do you invest in such a world?

Real estate, aside from nursing homes, will be unattractive given large vacancies. Governments won’t be able to repay debt as their taxable populations are shrinking and they have to deal with exploding healthcare and pension costs. The demand for commodities will be reduced as there is less construction and industrial activity happening. Traditional diversification will fail to provide the desired benefits as they all represent bets on positive economic growth.

How about equities, or equity proxies like private equity or venture capital?

Well, corporations will still aim to generate a profit for their shareholders, although this will be more difficult when economic growth is low or negative. Stocks might simply go up as investors do not like the alternatives, but an elderly population does also not like to take too much risk. The long-term outlook for equities is unclear.

Instead of the traditional buy-and-hold approach to stocks, investors may consider applying a trend following strategy to equities, which we explore in this article.