OCF Momentum: Local Benchmarks Change Everything

We tested the same cash flow divergence signal on 9 stock markets over 25 years (2000-2025). Results ranged from +13.0% CAGR in India to +2.2% in Thailand. The key finding: comparing all markets to the S&P 500 hides the real story. When measured against local benchmarks, the signal works in most developed markets (Canada +6.2% vs TSX, UK +5.6% vs FTSE, Switzerland +4.6% vs SMI) and delivers modest alpha or neutral performance elsewhere. Only Thailand consistently underperforms its local benchmark. The old narrative ("works in emerging markets, fails in developed markets") was wrong. The correct finding: OCF divergence beats weak local indices and works where quality matters.

Contents

1. What We Tested
2. Cross-Market Results
3. Ranked by Alpha vs Local Benchmark
4. Three Tiers Emerged (vs Local Benchmarks)
5. Max Drawdown Comparison
6. Sharpe Ratio Comparison
7. Why India's Story Changed
8. Why Canada Actually Won
9. Why It Failed in Asia
10. Why It's Neutral in Developed Europe
11. When the Signal Works (Cross-Market Patterns)
12. When the Signal Fails (Cross-Market Patterns)
13. The Pattern
14. Regional Blogs
15. Run It Yourself
16. Limitations
17. Takeaway

Data: FMP financial data warehouse, 2000–2025. Updated March 2026.

What We Tested

Signal: Buy stocks where operating cash flow is growing faster than earnings (positive divergence). Rank by divergence magnitude, hold top 30, equal weight, rebalance annually.

Filters: OCF growth > 10%, ROE > 10%, operating margin > 5%, market cap > local threshold.

Markets: US, India, Canada, UK, Germany, Switzerland, Japan, Hong Kong, Thailand (9 total).

Period: 2000-2025 (25 years, 25 annual rebalances).

Benchmarks: Local index for each market (Sensex for India, TSX for Canada, FTSE 100 for UK, etc.). SPY used for cross-market comparison where noted.

Cross-Market Results

Ranked by Alpha vs Local Benchmark

Three Tiers Emerged (vs Local Benchmarks)

Tier 1 - Strong Alpha (>3% excess): Canada, UK, Switzerland - Beat local benchmarks by 4-6% annually - UK's 76% win rate is remarkable - All three had weak local indices (TSX 4.0%, FTSE 1.2%, SMI 1.7%) - Key insight: quality signals shine when benchmarks are weak

Tier 2 - Modest Alpha (0-3% excess): Germany, Hong Kong, India - Beat local benchmarks by 1-2% annually - India's story changed: +0.9% vs Sensex (not +5.4% vs SPY) - Drawdown protection more important than alpha

Tier 3 - Neutral or Negative: US, Japan, Thailand - US: -0.6% (essentially neutral) - Japan: -0.4% (nearly neutral after cash drag) - Thailand: -3.0% (only market that consistently fails)

Max Drawdown Comparison

India's -17% max drawdown is the standout. Despite being an emerging market with high volatility, the cash flow quality filter provided exceptional downside protection. Compare to: - US: -38% - Germany: -50% - Japan: -52% - Thailand: -53%

Cash flow divergence doesn't prevent crashes, but it helps identify companies that survive them.

Sharpe Ratio Comparison

Canada delivered the best Sharpe (0.43), nearly matching SPY (0.45) while generating 2.3% excess CAGR. India had lower Sharpe (0.30) but much higher absolute returns.

Developed markets (UK, Germany, Switzerland) showed weak Sharpe ratios (0.21-0.37) despite low volatility, reflecting consistent underperformance that compounds over time.

Asia (Japan, Hong Kong, Thailand) posted negative or near-zero Sharpe ratios, meaning the strategies didn't even beat cash after adjusting for risk.

Why India's Story Changed

Old claim: +13.3% CAGR, +5.4% alpha. New reality: +13.0% CAGR, +0.9% alpha vs Sensex.

The old comparison was misleading. We compared Indian stocks (in INR) to the S&P 500 (in USD). The Sensex itself returned 12.1% annually over 25 years. The strategy's alpha vs the local benchmark is modest: +0.9%.

What India actually delivered: 1. Strong absolute returns (13% CAGR), but the Sensex did almost as well 2. Much better drawdown protection: -20.6% vs Sensex -32.2% 3. Crisis resilience: +16.8% in 2008 vs Sensex +7.3%, +50.7% in 2013 vs +32.8% 4. 56% win rate against the local benchmark

The edge isn't in alpha. It's in risk-adjusted returns and downside protection.

Why Canada Actually Won

+10.2% CAGR, +6.2% alpha vs TSX Composite. The signal's best market.

Canada delivered the strongest alpha of any market tested when measured against its local benchmark. The TSX Composite returned just 4.0% annually over 25 years. The OCF divergence strategy delivered 10.2%. That's 2.5× the index return.

1. Resource-heavy market. Energy and materials stocks have volatile earnings but more stable cash flows. The divergence signal works when earnings are noisier than cash.
2. Conservative accounting. Canadian IFRS is stricter than many emerging markets but less dominated by analyst scrutiny than the US. Sweet spot for the signal.
3. Smaller market, less efficient. TSX has less coverage per stock than NYSE/NASDAQ. Systematic signals have more room to work.
4. Zero cash periods. The strategy was fully invested all 25 years. No data quality issues, no filter-induced cash drag.

Why It Failed in Asia

Japan (-4.6%), Hong Kong (-5.0%), Thailand (-5.7%).

1. Weak shareholder orientation (Japan). Companies generate cash but don't return it. OCF growth doesn't predict stock returns when governance is poor.
2. Holding company structures (Hong Kong). Listed companies are often shells for Chinese assets. OCF at the HoldCo level is meaningless.
3. Political/currency risk (Thailand). When stock prices are driven by coups, currency crises, and conglomerate politics, financial signals don't matter.
4. Cash drag. Japan and Thailand held cash 24% of the time due to strict filters eliminating most local companies. The ROE > 10% filter doesn't fit Asian corporate culture.

Why It's Neutral in Developed Europe

UK (-0.2%), Germany (-1.2%), Switzerland (-1.6%).

1. Strong accounting standards. UK IFRS and European GAAP are strictly enforced. Companies have little room to manipulate earnings. The divergence signal loses power.
2. High analyst coverage. FTSE and DAX stocks are heavily covered. Cash flow information is quickly incorporated into prices.
3. Sector mix. European markets are dominated by financials, industrials, and consumer staples with predictable cash flows. Less divergence to exploit.

When the Signal Works (Cross-Market Patterns)

Crisis periods. India 2008 (+42% excess), Canada 2009 (+19% excess), US 2000 (+30% excess). When markets crash, cash-generative companies with genuine quality outperform.

Commodity recoveries. Canada 2020 (+13% excess), India 2016 (+30% excess). When resources rebound from troughs, companies with real OCF growth (not just price-driven earnings) capture upside.

Emerging markets with weak governance. India consistently. The weaker the accounting enforcement, the more informative cash flow becomes.

When the Signal Fails (Cross-Market Patterns)

Growth-dominated markets. US 2018-2021, Japan 2013-2017, Hong Kong 2010-2013. When sentiment and growth narratives dominate, cash flow quality doesn't matter.

Export-heavy economies. Germany throughout. When cash flows are more volatile than earnings (manufacturing working capital swings), the signal misfires.

Weak shareholder orientation. Japan, Hong Kong. When companies generate cash but don't return it, OCF growth doesn't create shareholder value.

The Pattern

Cash flow divergence works where accounting is weak and fails where it's strong.

This is counterintuitive. You'd expect quality signals to work best in developed markets with clean data. The opposite is true. The divergence signal needs earnings to be less reliable than cash flow. In markets with strong accounting (US, UK, Europe), earnings are already quite reliable. The signal adds no value.

In markets with weak accounting (India) or noisy earnings (Canada resources), cash flow is the more trustworthy metric. The divergence signal has power.

Regional Blogs

For detailed analysis of each market: - India: +13.3% CAGR, +5.4% Alpha - Canada: Best Sharpe Ratio, +10.2% CAGR - US: Matched SPY Long-Term, Regime-Dependent - UK: Neutral Results, High Volatility - Germany: -1.2% Underperformance, -50% MaxDD - Switzerland: Mild Underperformance, Defensive - Japan: -4.6% Underperformance, Weak Governance - Hong Kong: -5.0% Underperformance, HoldCo Issues - Thailand: Worst Performer, -5.7% Underperformance

Run It Yourself

Run the global OCF momentum comparison on Ceta Research

Screen stocks across all 9 markets with the same criteria: OCF growth > 10%, positive divergence (OCF growth > NI growth), ROE > 10%, operating margin > 5%, market cap thresholds adjusted per exchange (see individual regional blogs for local currency thresholds).

Limitations

Currency risk not modeled. Returns are USD-adjusted but don't account for hedging costs. Real-world multi-market portfolios would need currency management.

Survivorship bias. FMP data includes some delisted stocks but may not capture all failures across all exchanges. Returns could be overstated.

Data quality varies by market. Indian and Thai financial data has more gaps and corrections than US data. Some results may reflect data artifacts.

No transaction costs. The backtest doesn't model exchange-specific transaction costs, which vary widely (US ~0.05%, India ~0.5-1.0% with STT/stamp duty). Real-world returns would be lower.

Single-country risk. Each market represents a bet on that country's equity market outperforming. Macro risk (currency devaluation, regulatory changes, geopolitical shocks) can overwhelm the signal.

Point-in-time methodology. We used 45-day filing lags to avoid look-ahead bias, but real-world implementation may face data delays, especially in emerging markets.

Takeaway

The same signal, applied consistently, generated +5.4% alpha in India and -5.7% underperformance in Thailand. That's an 11 percentage point spread. Market structure matters more than signal design.

If you're screening global stocks for cash flow quality: - Overweight: Emerging markets with weak accounting (India works, others untested) - Neutral: Developed markets with strong accounting (matches benchmark, doesn't beat it) - Avoid: Asian markets with weak shareholder orientation (Japan, Hong Kong, Thailand) - Opportunistic: Resource markets during commodity cycles (Canada works consistently)

Cash is harder to fake than earnings. But only in markets where earnings are fakeable in the first place.

Data: Ceta Research (FMP financial data warehouse), 9 markets, 2000-2025. Full methodology: backtests/METHODOLOGY.md