Broken Arrows And Contrarians

In fact, it does not matter whether Dubai goes broken or not, if the world sees it as a singular event ... Abu Dhabi, the sandy oil brothers, already own Dubai's iconic Burj Al Arab hotel. So, nothing new in that regard. The only thing that matters in the global picture is whether this has an impact on the view of global recovering.

Markets have shown technical non-confirmations for some time now ... and Citi's US Economic Surprise index has turned down too.

Click on chart to enlarge, courtesy of Citigroup Global Markets.
Contrarians, whatever sort of them, have their own game, also today.

For example, Citigroup Global Markets were musing in their latest European Portfolio Strategist:

Contrarian strategies work well at turning points. We have seen a major turning point in 2009. Investor sentiment swung wildly from depression fears to recovery hopes. The Survivors Party brought with it the return of the “baggers”.

But, contrarians are insatiable. Looking ahead to 2010, they will be looking for another major turning point for the global economy and for financial markets. But, by definition, such turning points do not occur that often. That is why contrarians can struggle for years before enjoying the fruits of their strategy.

While at the end of last year we saw the building case for a contrarian investor, it is more difficult to see clear leadership from our contrarian and momentum baskets into 2010. We believe contrarian investors will not enjoy the same level of outperformance. We suspect that 2010 will be a more even battle.

The longer-term contrarian position is perhaps more interesting. The patient (10-year) contrarian would be buying equities, big-caps and growth but selling emerging market equities. That is a big contrarian call. Time will tell. But, for now we disagree and think that emerging markets continue to offer investors the best route to growth in a lower growth world.

Unlike with TMT at the end of the 1990s, emerging market equities do not look expensive currently. Valuation is often one of the key ingredients to a successful contrarian strategy. Selling TMT at the end of 1999 and buying the 2009 risk trade (eg ultra-cheap Banks) were both helped by extreme valuations. At 2x price/book, emerging market equities do not look cheap or expensive enough for contrarians to make a big call on.

Do you know what kind of contrarian are you?