Long Abu Dhabi
Performance cyclicality places Abu Dhabi as a relative buy among global equity indices along with an outperforming outlook for energy assets and volatility.
Behavioral finance suggests that though forecasting ability is a myth, extreme losers tend to outperform. Indirectly behavioral finance like Gauss addresses the order in randomness. Invariably there is a certain pattern that summarizes our chaos. For hundreds of years we have tried to understand how when a beetle is left in space in a tube of infinite length, the probability of it reaching back to where it started is 1. This repeating order and certainty in pattern is why research remains an exciting science.
However, like any other business, even research has to address risk issues before making forecasts. Absolute calls will always be more risky than relative calls. If real portfolios are about relative performance (as returns are benchmarked) why should research not address relative performance? Behavioral finance trashes absolute forecasting, but relative forecasting is a new science and somewhere hard to challenge.
I am going to make some relative forecasts with my long case on Abu Dhabi. The local index should outperform DOW and many other global equity indices over the first half of 2011. We will review our portfolio end of the current quarter.
The Orpheus idea of relative performance is linked with relative price performance rankings. The best performers are the ones that should underperform while the worst performers are the ones that should outperform in the time ahead. We are assuming a multi-month investment horizon. Our idea is very simple, if volatility fell by 72% in 12 months and Netflix (Movies and TV shows online) rose by 255%, one could have relatively made a gain of 328% in a year buying the winner and selling the loser. And if there were a few lucky investors who did execute the strategy it’s a rare chance that strategy might continue to deliver returns for another quarter. So what we are saying is that extreme performances happen near reversals and the best and the worst generally shift polarity. This means an anticipation of buying into volatility and selling companies like Netflix could deliver gains ahead.
Now we are not necessarily talking about a long – short strategy here, but generally about the worst losers that one should look at. As the worst losers offer real value and the best gainers should be reduced or exited as they are expensive per unit of risk. Among a global list of nearly 1000 assets the VIX (volatility) Futures (iPath S&P 500 VIX Short-Term Futures ETN) was the worst performer along with Short ETFs on US Indices. The performance of VIX and Short ETF’s on US equity is correlated as both volatility and short ETFs fall as the markets rise. When shorts are the worst performers, it’s an extreme suggesting that shorting US equity has been a losing proposition till now and the very cyclical reason that it’s time to expect a reversal and not to abandon shorts.
On the top performing side, we have the Agricultural Equity Index (MOOO.L) and CBOE Technology Index TXX (up 23% for the year). Technology has been a global top performer. CNXIT Indian Technology sector index is also a top performer. Though the settings were different, similar assets performed in similar time.
For the MENA region, Abu Dhabi Index ADX was flat for the year. And this does place it in the lower rankings compared to Nikkei and the Central Europe Index. From a mere performance scale, ADI delivered much lower than Dow (at 14%) for 2010.
According to Bill Meridian, “2011 should see money flowing out of Emerging Markets into US stocks.” We feel emerging can also be subdivided further into performers and underperformers. Rankings suggest Abu Dhabi (UAE), Bahrain, Kuwait might outperform the US while India might underperform for the first quarter.
Regarding other major indices, the S&P 500 is not an extreme positive performer yet and continues to be positive. This positivity is confirmed by high-performance ranking on Russell broad-based indices (down 15% for the year). Real market tops should see the broad market weakening, which is not the case now. Intermediate top happens two or three times a year and we can expect blue chip weakness while the broad market may continue to remain strong.
Broad markets are like the big ships, which take more time to turn. If the bigger ship has not reversed in performance, the indicators suggest that we don’t have to worry about a real primary multiyear case of weakness yet. There might be rise in volatility, an intermediate multi-week weakness where top ranking Technology, Material and Agro sectors pause and underperform and UAE indices and other worst ranking assets outperform.
We should not forget that UAE’s oil rich reserves are a natural hedge for local equity markets. The same ranking that we have done on equity places energy assets low on rankings and hence as potential outperformers for the time ahead. Any dip for a few weeks remains an accumulated opportunity for energy assets and a long case for Abu Dhabi.
Behavioral finance suggests that though forecasting ability is a myth, extreme losers tend to outperform. Indirectly behavioral finance like Gauss addresses the order in randomness. Invariably there is a certain pattern that summarizes our chaos. For hundreds of years we have tried to understand how when a beetle is left in space in a tube of infinite length, the probability of it reaching back to where it started is 1. This repeating order and certainty in pattern is why research remains an exciting science.
However, like any other business, even research has to address risk issues before making forecasts. Absolute calls will always be more risky than relative calls. If real portfolios are about relative performance (as returns are benchmarked) why should research not address relative performance? Behavioral finance trashes absolute forecasting, but relative forecasting is a new science and somewhere hard to challenge.
I am going to make some relative forecasts with my long case on Abu Dhabi. The local index should outperform DOW and many other global equity indices over the first half of 2011. We will review our portfolio end of the current quarter.
The Orpheus idea of relative performance is linked with relative price performance rankings. The best performers are the ones that should underperform while the worst performers are the ones that should outperform in the time ahead. We are assuming a multi-month investment horizon. Our idea is very simple, if volatility fell by 72% in 12 months and Netflix (Movies and TV shows online) rose by 255%, one could have relatively made a gain of 328% in a year buying the winner and selling the loser. And if there were a few lucky investors who did execute the strategy it’s a rare chance that strategy might continue to deliver returns for another quarter. So what we are saying is that extreme performances happen near reversals and the best and the worst generally shift polarity. This means an anticipation of buying into volatility and selling companies like Netflix could deliver gains ahead.
Now we are not necessarily talking about a long – short strategy here, but generally about the worst losers that one should look at. As the worst losers offer real value and the best gainers should be reduced or exited as they are expensive per unit of risk. Among a global list of nearly 1000 assets the VIX (volatility) Futures (iPath S&P 500 VIX Short-Term Futures ETN) was the worst performer along with Short ETFs on US Indices. The performance of VIX and Short ETF’s on US equity is correlated as both volatility and short ETFs fall as the markets rise. When shorts are the worst performers, it’s an extreme suggesting that shorting US equity has been a losing proposition till now and the very cyclical reason that it’s time to expect a reversal and not to abandon shorts.
On the top performing side, we have the Agricultural Equity Index (MOOO.L) and CBOE Technology Index TXX (up 23% for the year). Technology has been a global top performer. CNXIT Indian Technology sector index is also a top performer. Though the settings were different, similar assets performed in similar time.
For the MENA region, Abu Dhabi Index ADX was flat for the year. And this does place it in the lower rankings compared to Nikkei and the Central Europe Index. From a mere performance scale, ADI delivered much lower than Dow (at 14%) for 2010.
According to Bill Meridian, “2011 should see money flowing out of Emerging Markets into US stocks.” We feel emerging can also be subdivided further into performers and underperformers. Rankings suggest Abu Dhabi (UAE), Bahrain, Kuwait might outperform the US while India might underperform for the first quarter.
Regarding other major indices, the S&P 500 is not an extreme positive performer yet and continues to be positive. This positivity is confirmed by high-performance ranking on Russell broad-based indices (down 15% for the year). Real market tops should see the broad market weakening, which is not the case now. Intermediate top happens two or three times a year and we can expect blue chip weakness while the broad market may continue to remain strong.
Broad markets are like the big ships, which take more time to turn. If the bigger ship has not reversed in performance, the indicators suggest that we don’t have to worry about a real primary multiyear case of weakness yet. There might be rise in volatility, an intermediate multi-week weakness where top ranking Technology, Material and Agro sectors pause and underperform and UAE indices and other worst ranking assets outperform.
We should not forget that UAE’s oil rich reserves are a natural hedge for local equity markets. The same ranking that we have done on equity places energy assets low on rankings and hence as potential outperformers for the time ahead. Any dip for a few weeks remains an accumulated opportunity for energy assets and a long case for Abu Dhabi.