Six investment themes to bet against in 2006 – MoneyWeek

However,thisisnotthereasontheconsensusviewisimportant。

Quitefrankly,itisimportanttoknowtheconsensusview,becauseitismoreoftenwrongthanright。

Whyisthat?

Arewesuggestingthatthemajorityofinvestorsarestupid?

Notatall。

Itwouldnotonlybearroganttosuggestthatbutalsofactuallyincorrect。

Inordertounderstandwhytheconsensusviewisoften(butnotalways)wrong,itisimportanttounderstandhowitisformed。

Itshouldn’tsurpriseyouthatthebestinvestmentsareusuallythosethatnoteveryonehasdiscovered。

Whenanewinvestmenttrendisborne,itusuallybeginswithsomereallysmartinvestorstickinghisneckoutlongbeforetherestofuscanseethelight。

Oncehehasestablishedhisposition,hestartsusingtheoldesttrickinthebook。

WecallitGetLongandGetLoud。

HewillbethepersonatthedinnerpartywhisperinginyourearthatyoushouldbuysharesinthisoilcompanyintheFalklandsIslandsthatnobodyhaseverheardof。

Theproblemis,atthisstage,yourreactionislikelytobeindifferentatbest,becauseitisnotyetawidelyheldview。

Nowimaginewhathappensnext。

Afewpeople,whoknowthetrackrecordofthepersoninquestion,actuallybuyintohisrecommendation。

Slowlybutsurely,theideaspreads。

Twoyearslater,theworstkeptsecretintheworldisthatyoushouldfillupyourportfoliowithsmalloilexplorationcompaniesinfarfetchedcornersoftheworld。

Atthispointthereallysmartguysellshisshares。

Noprizeforguessingwhomakesthemostmoney。

Andthepoorsoulwhoboughtitlastislikelytolosehisshirt。

Alongthewaythethemebecametheconsensusview。

And,preciselyatthattime,itwentfrombeingamoney-makingtoaloss-makingproposition。

Therefore,moreoftenthannot,itisnotcommendabletofollowtheconsensusview。

Theoddsarestackedagainstyou。

Instead,youwanttoinvestinthemeswhicharenotyetconsensusviews。

Thatishowthetrulygreatfortuneshavealwaysbeenmade。

Unfortunately,itisalsothemoredifficultthingtopulloff。

Weshallnowlookatwhatwebelievearesomeofthebiggestconsensustradesfor2006。

Thebadnewsis,ifyourecogniseeverythemeasbeingintunewithyourcurrentportfolio,youmaybeinforaroughtimein2006。

Justonefinalhealthwarningbeforewegothroughthelist。

Theconsensusviewsexpressedbelowrepresentourviewsandourviewsonly。

Pleaseforgiveusifwemissedoneortwoimportantones。

Andnowtothelist:

#6:TheEurolandeconomytorecover

Youmayask,whateconomicrevival?

Fairquestion。

Thesignsofrevivalarenotyetveryrobust,butthestrongsurgeinEuropeansharepriceslastyearistestamenttothefactthatmanyinvestorsexpectbettertimesaheadforthelethargicnucleusofEuroland,France,ItalyandGermany(theFIGcountries)。

Asaresultofstrongergrowthexpectations,themarketalsoexpectsEuropeaninterestratestorisemodestly。

Theovernightrateappearstobeheadingtowards2。

75%,andthe10-yearbondisheadingtowards4%from3。

48%currently。

Thatisifyoubelievetheconsensusview。

Theriskstothisviewaremany。

Wewillhighlightjustone。

IfthegovernmentsoftheFIGcountriescontinuetheircurrentlineofeconomicpolicies,wewillbetagreatdealthateconomicgrowthwilldisappointyetagain,notonlyin2006butalsoin2007。

ThereforewethinktherisktolongbondsinEurolandisonthedownsideasfarasyieldsareconcerned。

#5:Commoditypricestocarryonrising

ThisviewislargelyattachedtothegeneralbeliefthatstrongeconomicgrowthinAsia,andparticularlyinChinaandIndia,willcausecommoditypricestoriseforyearstocome。

Oneinterestingaspectaboutcommoditypricesisthat,althoughmanyarebullish,notsomanyhaveinfactpositionedthemselvesaccordingly。

Takethepensionfundindustry。

Itisourunderstandingthatmanypensionfundsarestillstrugglingtocometotermswiththisassetclass。

Howdotheygettheirexposure?

etc。

etc。

Partlyforthisreason,theoddsmaybetiltedinfavouroftheconsensusviewinthisinstance。

However,theconsensusconvenientlyignoresthefactthatcommoditypricesareextremelysensitivetoeconomicup-anddownturns,soalthoughtheunderlyingtrendmaybeup,investorscouldverywellbeinforaroughride,iftheglobaleconomysoftenslaterthisyear。

#4:Goldpricesheadinghigher

Goldusuallydoeswellwheninflationexpectationsareontherise。

Likewise,aweakU。

S。

dollarisoftenlinkedwithariseinthepreciousmetal。

Therecentruningoldpricesshouldthereforetellussomethingaboutinflationexpectationsandtheconsensusviewonthedollar(whichwewillgettoinasecondortwo)。

Afactoftenignoredbythegoldbullsisthatdemandforgoldisveryseasonal,andwehappentobeatthetailendofthepeakseason。

Forus,thejuryisstillout。

Wewillbealotmoreimpressedifgoldcansustainitsrallyintothespringandsummer。

#3:TheFedhasalmostdonethejob

ItisnowwidelyacceptedthattheFedisalmostdonewithitsseriesofratehikes。

Wehaveone,maybetwo,hikestogo,takingtheFedFundsrateto4。

75%atworst。

TheveryweakGDPreportreleasedlastFridayonlyreinforcedthisview。

TheequitybullsusethisargumenttobuildacaseforbuyingU。

S。

equities。

ForthefirsttimeinyearswehaveactuallyseenprominentEuropeanfundmanagersadvocatinganoverweightinU。

S。

equitiesrelativetoEuropeanequities。

ThemainrisktotheviewonFedpolicyisinflation。

Theimpactfromhigheroilpriceshasbeensubduedsofar,butdonotignorethefactthatlastFriday’sGDPreportalsoincludednotsogoodnewsonconsumerinflationintheU。

S。

WeknowthattheFedgovernorsareconcernedabouttheinflationoutlook。

Wesawinlastweek’sreportthatthisconcernmaybejustified。

Therisktothemarketisobvious。

TheFedmaynotbeasclosetotheendofthiscycleasmanyexpect。

IftheFedFundsratehastogo5。

50%orperhapseven6%,inordertotaketheairoutoftheloominginflationbubble,thingscouldgetprettyugly。

#2:U。

S。

imbalancesareunsustainable

Thisisabigone。

Itisanopinionheldalmostuniversally,andwecannotdothesubjectanyjusticeinaparagraphortwo。

Theviewitselfisstraightforward。

Alarge(andgrowing)tradedeficitcombinedwithaspirallingbudgetdeficitisadisasterwaitingtostrike。

Soonerorlater,theviewgoes,interestrateswillhavetogoup,andtheU。

S。

dollarwillhavetofall,inordertoaddressthoseimbalances。

Well,inouropinion,thingsarenotthatsimple。

Historically,imbalanceshavebeenadjustedthroughexchangeratesratherthanbondyields,sohistorysuggeststhatweshouldworrymoreaboutthedollarthanthe10-yeartreasuryyield。

Thedollar,however,isnotjustafunctionoftradepatterns。

Othercapitalmovementsareimportanttothevalueofthedollar。

Whichcurrenciesdothecentralbanksholdmuchoftheirreservesin?

WheredotheIndiansandChineseinvesttheirsavings?

Theoutlookforthedollaris,inouropinion,notasone-sidedasmanypeopleseemtothink。

#1:Japanesesharepricestogoupandup

Thisisprobablythebiggestconsensustradeofthemall。

WehavebeenstrugglingtofindanyonenotbullishonJapaneseequities。

Isitbecausewedon’tspeaktodomesticJapaneseinvestors?

Apparently,theyarenot(yet)verybullish。

Orthatisatleastwhatthebullsaretellingus。

Wehavetomakeaconfessionhere。

WelikeJapaneseequitiestoo。

PartlybecausewebelievetheYenisundervalued。

BybuyingJapanesesharesandnothedgingyourcurrencyrisk,youhaveaninterestingtwo-waybet,althoughwecringewhenusingthewordbetinthesamesentenceasdiscussinginvestments。

Whatcouldgowrong?

Inouropinion,therearetwobigriskstothisconsensusview。

Thewaragainstdeflationmayinfactnotbeoveryetand,secondly,Japan’seconomicwellbeingisfrightfullydependentongrowthelsewhere,asmuchoftherevivalhasbeenexportdriven。

TheU。

S。

economyhitabrickwallinthefourthquarteroflastyearasreportedlastFriday。

JapanisdependentontheU。

S。

economybothdirectlyandindirectly。

Indirectly,becauseChinaisnowJapan’slargestexportmarket,andChina’sbiggestexportmarketistheUnitedStates。

OtherConsensusThemes

Thelistaboveisbynomeanscompletewithoutabriefmentionofsomeoftheotherimportantinvestmentthemesthatseemtodominatetheworld。

HousepriceshaveprovensuchapowerfulfuelforthespendingspreethatconsumersintheAnglo-Saxonworld,Spain,Scandinavia,etc。

haveenjoyedinthelastfewyears。

Mostpeopleseemtobelievethatasoftlandingforhousepricesisthemostlikelyoutcome。

Onewonderswhatwouldhappeniftheoutcomeisnotsobenign。

TheinvertedU。

K。

yieldcurvesuggestsahighprobabilityofarecessionloomingintheUK,buttheconsensusviewappearstobethattheUKeconomyisheadingforamoremodestslowdown。

Hastheyieldcurvelostitspredictivepowersoristhemarketignoringtheobvious?

Thesmalladjustmentlastsummeroftherenminbiwas,intheopinionofalargemajorityofthemarket,hopelesslyinadequate,andtheconsensusviewseemstobethatthereisonlyonewaytogofortheChinesecurrency–furtherappreciation。

ThisviewcompletelyignoresthefactthatthevalueoftheChinesecurrencyisdictatedbythepoliciessetbytheChineseleadership。

Donotbesurprisedifthechangeinvalueoftherenminbioverthenextfewyearsprovestobeveryminorindeed。

Conclusion

Obviously,someoftheconsensusthemesabovewillturnouttobespoton。

Otherswillperhapsbeprovencorrecteventually,butthetimingwasoff。

Andsomewillturnouttobeembarrassinglyinaccurate。

Ifhistoryrepeatsitselfanditoftendoeswhenitcomestomarketpsychologymorethan50%oftheconsensusviewsdiscussedabovewillprovetobemoney-losingpropositionsinyourportfolioin2006。

Itwouldthereforebeaninterestingexercisetocreateaportfolioconsistingofideaswhichgoagainstallthebigconsensusthemes。

Youwouldbefarmorelikelytomakeagoodreturnonthatportfoliothanifyouwerejusttofollowtheherd。

Itrequirescourage,perhapsevenaregulardoseofImodium,todoso。

Buttheoddswillnowbeinyourfavour。

ByNielsC。

Jensen,chiefexecutivepartneratAbsoluteReturnPartnersLLP。

TocontactNiels,email:njensen@arpllp。

com

NakedTextNakedText