Rudi On Thursday

This story features BHP GROUP LIMITED. For more info SHARE ANALYSIS: BHP

What do you think would be the biggest threat to this year’s end of year rally?

More bad news from Citigroup?

Crude oil above US$110?

Higher inflation in the US?

The Aussie dollar at parity with the greenback?

Or maybe a fierce come back from the US dollar?

While each of these events would have a clear negative impact on the Australian share market, the biggest threat, as is so often the case, may well come from inside the financial markets instead of outside.

Emerging share markets, base metals, energy and precious metals have all generated such good returns for many professional investors that some have already started taking away some of their investments from these markets. As the Australian share market has been among the good performers so far this year, one can only assume some money is equally being withdrawn from the likes of BHP Billiton ((BHP)) and Woodside Petroleum ((WPL)).

This is not something I just made up. Earlier today, after reading yet another reference to some institutions shifting their funds, it dawned on me that I have came across several references to the above scenario in various publications, market commentaries and research reports this week.

And the reason why I mention it here is because it makes sense. (Some might argue that because it makes sense it is by definition happening).

If you’re in the business of keeping your clients happy, and you’re bound to do so by showing a nice performance figure at key dates, such as the end of the calendar year, you’re probably looking right now at de-risking your performance for the remainder of the year.

After all, we’re only a few weeks off from Christmas. Probably equally important is that many assets are widely believed to be expensive and while that doesn’t necessarily mean these assets will lose value tomorrow, it does suggest that further upside may become more difficult to achieve.

In practical terms such a dilemma would translate into something like: am I prepared to lose a big chunk of the gains I made so far this year for a potential two or three percent more on my performance sheet?

The answer given is probably dependent on what your performance sheet looks like thus far. If you went big in Japan, or in Sweden or Switzerland, or in US financials you probably need to be in the market until the very last day. In all other scenarios you’re probably thinking what I am thinking and that is: better to look forward to a relaxing and tranquil Christmas break instead of risking too much.

A very important factor in these considerations is the assessment of the risk balance. This year this will be even stronger so as there is still no certainty about whether the US will avoid a recession (remember US housing is expected to reach bottom from Q1 next year onwards) or when this subprime/CDO/credit problem will be dealt with (another eight months?).

Above all, there is a general sense that more and more investors are chasing fewer and fewer assets, and this, everyone knows, is by default a dangerous situation. Not so much at times of a clear upward momentum, but when the turn comes. Don’t fool yourself, there’s always a turn at the horizon.

Remember how I wrote over the past weeks that some of the best informed and most experienced market participants had decided to sell their exposure to the surging gold price – even though they were convinced it would go up further still?

None of them feel sorry today for the gains that have not been made.

As market strategists at GaveKal put it this week: the key question investors are now facing is whether to stick with the assets that enjoy strong momentum, or to start looking for cheaper assets with less (but still good) momentum?

GaveKal believes it may be time to consider the second option. In the strategists’ view this now means equity markets such as those in India, China and Brazil have become less attractive, and so are gold, oil, resources and materials, as well as equity markets in Canada and Australia.

Instead, GaveKal believes soft commodities and technology (IT and hardware in particular) look far better alternatives. In terms of regional assets the strategists would opt for small caps in Hong Kong, and shares in general in South Korea, Singapore and Taiwan.

Expect a volatile run towards the end of the year.

Till next week!

Your editor,

Rudi Filapek-Vandyck
(As always firmly supported by Greg, Chris, Grahame, George, Pat, Joyce, Sophia and Paula)

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