Contrarians look to rule roost in 2013
Comment of the Day

December 20 2012

Commentary by David Fuller

Contrarians look to rule roost in 2013

My thanks to a correspondent in Russia for this report by Robin Wigglesworth for the Financial Times. My only regret in posting this is that the source's comparison of the DAX and S&P500 performances for 2012 to date in Russian, obviously for local recipients, could not be replicated when I changed his word document into a PDF file for posting on Fullermoney. Here are some interesting samples from the FT article, and the sequential numbering is my own:
1. China's growth is still so strong, despite a slowdown, that it is effectively creating an economy the size of Greece's annual output every three months. But investors would have been much better off putting their money in the Athens stock market this year.

2. But some have offered more unconventional choices for 2013, not all of which look particularly enticing. However, Peter Oppenheimer, chief global equity strategist at Goldman Sachs, points out that price matters more than growth. "You can find lots of places with dismal fundamentals but valuations that overstate just how dismal they are," he says.

3. One of the most popular contrarian bets suggested by fund managers and strategists is one that has frustrated for more than two decades: Japanese equities. The fundamentals appear gloomy. Japan has just entered its fifth recession in 15 years, the government is the most indebted in the world and the stock market has proven a perennial disappointment. Yet Shinzo Abe, recently elected premier, has promised aggressive fiscal stimulus and called for "unlimited" monetary easing in an effort to fight deflation.

4. There are other unloved equity markets for investors who like going against the flow. Brazil's Bovespa and Spain's Ibex indices have dipped in US dollar terms this year and stocks are on average trading close to their forecast book value next year. But Brazil's bourse would benefit if China's economy regains its vim.

5. With the prospect of European Central Bank intervention, improving competitiveness and hopefully even some economic bright spots towards the end of next year, Spanish equities could prove to be an unlikely 2013 winner. "Greece shows that growth is not everything," says Luca Paolini, chief strategist at Pictet Asset Management. "It's all about beating expectations."

6. Yet many fund managers argue the most appealing contrarian thesis for 2013 is that US economic growth surprises positively - causing Treasury yields to move significantly higher.

7. Betting against the bond market has been a popular but unprofitable trade for several years now. Some investors think 2013 may be the year their luck changes.

David Fuller's view Some of this will resonate with subscribers, not least as Fullermoney does use what I have long described as Behavioural Technical Analysis. Delegates who have attended The Chart Seminar will be familiar with BTA, as are veteran subscribers. So we look for contrarian themes, and preferably wait for them to show at least initial signs of reversal on price charts. Thereafter, we aim to run with reasonably consistent trends, particularly while they outperform.

1. and 2. China's economy is strong but growth has slowed as the government reined in a property price bubble, so it has taken over 3 years for SHASHR to break the downtrend, best defined by the progression of lower rally highs (see also earlier comments over the last three weeks). Greece has outperformed because it was discounting expulsion from the eurozone and some hedge funds were inevitably short in a thin market. It is still recovering but would you back Greece or China over the next 5 to 10 years? I wish Greece well but China could be the world's largest economy in 10 years and its market is also historically cheap today.

3. Japan has been a nightmare for years and Fullermoney has been waiting a long time for an aggressive fiscal stimulus and a weaker yen. Shinzo Abe's election and policies represent the best chance for a Japanese stock market recovery that we have seen for a long time, and the Nikkei 225 is arguably cheap. Although temporarily overbought, a reasonably tight consolidation of recent gains, followed by a sustained break above the last two rally highs, would provide additional evidence that a major rally was underway.

4. and 5. Spain, like Greece above, is still recovering but the easiest part of the move has already been seen. Brazil is an obvious beneficiary if China performs well but there are concerns over governance and inflation. Nevertheless, Luca Paolini makes a very important point about "beating expectations" which have already been reflected by market action.

6. and 7. It is all in the timing. I have described US bonds and similarly performing fixed interest markets as being in the latter stages of a 30-year plus bubble. However, I question whether US growth, which hopefully improves, will be strong enough to tempt Mr Bernanke to curb the Fed's massive buying in 2013. I think bond holders should be booking profits by easing out of long positions, or at least use trailing stops, but shorting too early in a bubble can be catastrophically expensive.

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