Christmas luncher

We have in the past at this time of the year referred to the story of the "Christmas luncher". This goes back to a bygone era when fund managers met for their Christmas lunch to speculate amongst themselves what they think will be the winners and losers of the coming year whilst enjoying a few glasses of a fine claret.

The big decision was always do you stick with the winners of the past year or look to speculate on last year's losers being the coming years winners. The great temptation was to go for the mean reversion and pick the losers, but as a great friend of mine at Citi, Rob Buckley who did a lot of work in the past analysing the "Christmas luncher", sticking with the previous year's winners was often the most profitable decision.

In the past couple of years not much has worked out as professional investors had anticipated. For example at the start of 2014 investors were bearish on bonds as they anticipated the end of the US QE and bullish on equities. With exception of the US equity market, developed markets are pretty flat in absolute terms so far this year, and bonds have performed well.

As we end 2014 current investor surveys suggest that the "Christmas luncher" is happy to stick with this year's winning sectors, technology and pharma and shun this year's loser the resource sector.

Possibly without realising it this positioning is in reality a proxy trade for bond markets to remain robust, as these sectors tend to perform well in low yield environments. The reason for this is partly because the pharma sector is considered a bond proxy, and the tech sector tends to run cash on the balance sheet making it attractive in periods of low inflation and low bond yields.

Low bond yields tend to signify low economic growth, and benign inflation expectations and therefore considered not a conducive environment for cyclical sectors such as the mining sector, which rely on both for earnings growth. Expectations are for yields to remain close to current levels in the coming year, as investors remain unconcerned on inflation in particular, could this be another year when things don't quite go according to the script? Pass the claret! 

Posted on December 3, 2014 .