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Shorting the Australian Stock Market, Oil & Soft Commodities

March 17th, 2015 · Greg Atkinson · 16 Comments

So far this year the ASX 200 has been staging a fairly impressive rally having moved from around 5300 points at the start of trading in January to over 5900 in early February. It has since pulled-back a touch but is still up around 10% for the year so there are plenty of reasons to be bullish about the outlook for the market for the rest of the year. However I remain cautious about the outlook for Australian shares and the global economy and maintain my view that a significant correction is not far away.

Clearly growth in China is slowing and in the other major global economies i.e. the European Union, USA and Japan low interest rates and Quantitative Easing (QE) are being used to prop up growth. These measures may or may work but whatever is the case, the reality is that years after the global financial crisis the global economy is still struggling to repair itself.

In Australia, GDP growth has been trending downwards for more than a decade, productivity growth has stalled and the mining boom is over. However real estate prices continue to rise as does household and government debt with the former no doubt given a boost to some extent by the RBA’s moves to lower interest rates. (currently the cash rate is 2.25%)

Using interest rates as a tool to prop up growth seems to be considered by central bankers as a sure way to get economic growth going, but for an economy exiting a mining boom (or as I called it – a commodities bubble) it’s probably not the wisest move. Yes the Australian dollar has fallen against the US dollar and other currencies, but at best this will just window-dress the export numbers for a while because fundamentally the Australian economy is unbalanced and globally uncompetitive in many sectors.

So taking all this into account, I have adjusted my investment strategy – but before I delve into that let me just highlight again that I am not aiming to provide investment advice or am I suggesting anyone buy, sell or hold anything (including cattle).

Rather than use index charts or commodity prices charts to highlight market moves or trends I am going to use actual ASX funds in order to better illustrate how real gains or losses can be made by investing in commodities or in the stock market in general.

First let’s look at a fund which is designed to track the performance of the S&P/ASX 200 Index.

S&P/ASX 200 ETF (ASX:STW) 1 Year Price Chart

S&P/ASX 200 ETF 1 Year Chart

The S&P/ASX 200 Exchange Traded Fund (ETF) is basically an ASX traded fund that is designed to track the performance of the S&P/ASX 200 Index. As the chart shows it reflects what the ASX 200 (XJO) is doing but is not a direct mirror of the ASX 200 in that a unit price of $56 does not mean the ASX 200 was trading at 5600. (the XJO was actually around 5900 points around that time)

But it does show how investors can effectively take a position in the ASX 200 and the advantage of this type of fund is that it pays dividends while longer term investors like myself sit back and hopefully see some capital gains build-up over the years.

Clearly the ASX 200 and therefore the S&P/ASX 200 ETF have both done well so far this year. But I think they are both in the over-bought zone now so the the first time ever I have decided to effectively short the Australian stock market via another ASX traded fund or product.

At this point I need to point out that I am not recommending any particular fund or product and that there are many to chose from. I also need to stress that all these products and funds and not like cash in the bank and there are risks involved in investing in them. So I urge readers to do their own research and seek professional advice as needed before making any investment decisions.

To “short” the Australian stock market I have bought into the BetaShares Australian Equities Bear Hedge (ASX:BEAR). Why? Simply so I can hopefully benefit (i.e. profit) from any significant market correction while still maintaining a position in the The S&P/ASX 200 Exchange Traded Fund.

In other words I am effectively forecasting that the Australian stock market will be higher in 5 years than it is now, but that there will also be a significant correction in the short term.

But as I said there are risks involved in this strategy as the chart below highlights.

BetaShares Australian Equities Bear Hedge (ASX:BEAR)

Australian Equities Bear Hedge 1 Year Chart

The major risk is that this fund will fall in value if the ASX 200 rises, so if the market was to rise steadily from this point onwards without any major dips along the way, then I am most likely to incur a loss. Of course I have not “bet the house” on a market correction, but nonetheless in my opinion, shorting the ASX via this type of fund is riskier than going long via a fund such as the S&P/ASX 200 ETF.

In addition to predicting a decent market correction in the short term I am also expecting that over the long term commodities (both hard and soft) will rise and that we have not entered an era of cheap oil. Yes the price of oil may fall further but I believe that in a year or so those who predicted it would trade at USD$20 a barrel for an extended period of time will look just as silly as those who predicted it would break though $200 back in 2007/2008.

One way to invest in oil is to take a position in an oil & gas producer like Santos Limited (ASX:STO) or in AWE Limited (ASX:AWE), but I have recently decided to invest more directly via another ETF – BetaShares Crude Oil (ASX:OOO).

BetaShares Crude Oil ETF 1 Year Chart

Crude Oil ETF 1 Year Chart

Again investing into this type of ETF is not without risk and if oil prices were to keep falling and remain low for years (say under $40 USD a barrel) then again a position in this fund is likely to be a drag on a portfolio.

But my guess is that although oil prices might fall further that in the long term the global economy still has a thirst for oil and that demand & prices will head higher again. In the meantime when the price of oil is falling I will do my best to avoid paying too much attention to the “on paper only” losses.

I am also a believer over the longer term in soft commodities (such as corn, wheat, soybeans & sugar) and again although prices might be suppressed at the moment, I am guessing that in 2 years or so prices will be on the way up and perhaps even sooner than that if the US Federal Reserve Bank starts to increase interest rates.

Again one way to tap into this investment area is via as ETF and one option is via the BetaShares Agriculture ETF.

BetaShares Agriculture ETF (ASX:QAG) 1 Year Price Chart

BetaShares Agriculture ETF 1 Year Chart

Clearly over the past year this fund and soft commodities prices in general have been have been heading downwards and they could head even lower from this point forwards. So by taking a position in a fund like this means taking on a fair amount of risk as well, therefore if you are the type of investor who worries about unrealised losses every night then I’d suggest you stay clear of these types of ETF’s.

My view however is that although this type of investment may cause some short term pain that over the longer term, it could be a good way to balance a stocks portfolio and provide decent long term gains. But of course getting the entry and eventual exit timing right is very importnat.

But there are many funds (ETF’s and ETP’s) available and I would suggest that potential investors read the information about these products on the ASX Website (ETFs and other ETPs) as part of their research.

Finally let me stress again that betting that commodities prices will rise over the longer term is not a risk free investment strategy and it will be a year or more before I will have any idea if the strategy is possibly working. In addition moving into a fund that effectively shorts the Australian stock market is also quite risky especially when interest rates are low and there are many who think the RBA will cut rates again!

This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Sydney but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp

16 responses so far ↓

  • 1 Stillgotshoeson // Mar 19, 2015 at 7:08 pm

    “In other words I am effectively forecasting that the Australian stock market will be higher in 5 years than it is now, but that there will also be a significant correction in the short term.”

    I tend to agree with this. My line of thought is maybe a 10% correction this year. (regaining the 6000+) level before the bigger correction. (maybe my retest of GFC low that I am expecting) in the 2016/2017 period then on to bigger and better things. All the cards falling into place would see the 2020~ time frame seeing new highs. Gold I think is in an intermediate bear market before the bull run continues, 2016 to 2019 should see good gains. Data out of the USA is still showing signs of a country muddling along and not showing a powerful recovery. I am expecting more QE in the not too distant future. I doubt the US economy is fundamentally strong enough for rising interest rates.

  • 2 Greg Atkinson // Mar 22, 2015 at 10:31 am

    Well Stillgotshoeson the market is still on a roll and might close about 6000 soon. My guess is that it will correct around 10% before it heads much higher otherwise my short position will start to look ugly.

    As for gold, I agree with you that it’s in a bear market but the question is will it go much lower before it trends up again?

    I also agree with your view of the US economy and so does Janet Yellen I reckon. The US Fed is being very cautious about raising rates and let’s not forget the economic recovery in the US is largely due to a 6 year $4.5tn bond buying programme.

    I reckon I could get an economy rolling with that sort of cash as well;)

  • 3 Stillgotshoeson // Mar 22, 2015 at 5:39 pm

    If I was a betting man, I’d say the odds are greater that Gold will more than likely double when the bull market resumes than reduce by 50% in any continuation of the bear market.

  • 4 lachlan // Mar 23, 2015 at 5:56 pm

    Old yellow may be bottoming again and ready to run up as we speak Shoes. I think the ASX200 has a very good chance of racing upward again here too.

  • 5 Greg Atkinson // Mar 24, 2015 at 8:35 am

    I think gold prices are still searching for a bottom and am waiting to see if the price dips under $1000 USD an ounce. After the gold price topped out in around 1980 it slumped and then basically kept falling for around 20 years. Maybe that won’t happen this time…but it shows that a gold bear market can be pretty ugly.

  • 6 Greg Atkinson // Jun 4, 2015 at 2:30 pm

    Looks like shorting the ASX a while back is starting to pay off with ASX:BEAR now up to around $17.30.

  • 7 Ned S // Jun 5, 2015 at 10:27 am

    You timed it extremely well Greg. Congratulations!

  • 8 Greg Atkinson // Jun 6, 2015 at 5:45 pm

    Thanks Ned but I have only timed the entry right, now I have to work out when to get out and hopefully make a profit. I’m usually not good at picking short-term trends so this could get interesting!

  • 9 Greg Atkinson // Jul 3, 2015 at 2:49 pm

    Well I lost my nerve and exited my position in ASX:BEAR. Not a huge gain but getting around a 5% return after a couple of months was better than just watch the market fall.

  • 10 Ned S // Jul 3, 2015 at 3:28 pm

    That’s WAY better than Glenn Stevens is getting me in bank interest Greg! LOL

  • 11 Greg Atkinson // Jul 3, 2015 at 4:39 pm

    Actually Ned if I “annualised” the gain it would be closer to 20% or more 😉

    But at least with Glenn you are not worried that the interest rate will end up costing you money…well not for now at least!

    All in all I’m not sure that shorting the market agrees with me. It requires too much focus!

  • 12 lachlan // Jul 3, 2015 at 5:53 pm

    I like the way you traded that Greg, getting short early into an extended market but yeah its is a lot of hard work, i feel it imposes on my other priorities for every day the position is in the water.

  • 13 Ned S // Jul 3, 2015 at 6:02 pm

    Just got off the phone to a mate of mine who trades stocks and a bit of currency Greg.

    I don’t. And our call was nothing to do with that as such. But I take an interest in what he does.

    And interestingly (maybe?) or coincidentally as the case might be, he was also exiting his positions as we spoke. And also feeling he’d done OK.

    Good on both of you. 🙂

  • 14 Greg Atkinson // Jul 4, 2015 at 1:09 am

    I would like to claim some credit for my short trade but I cannot – it was basically an experiment that worked out okay.

    My simple idea was that I saw no reason for the ASX 200 to be near 6000 a few months ago and so I guessed a correction was close at hand. (although to be fair to myself I have spotted a few of these corrections in the past..sometimes)

    But from this point forward I feel we are moving back into the Twilight Zone!

  • 15 Charles // Nov 25, 2015 at 6:50 pm

    Really interesting post. I also figured out that it is possible to short the australian market via binary options.


  • 16 Greg Atkinson // Jun 3, 2016 at 4:43 pm

    It’s possible we have seen the commodities market already bottom out. Certainly oil seems to be clear of a multi-year low and never did get stuck below $20 USD a barrel as some market commentators/analysts were suggesting earlier this year.

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