A short sale is betting that the price of something will fall. By a lot. And typically very quickly.
Indeed, the best short sells are the ones which see a share price fall rapidly.
Generally, the best targets for short sellers are companies that:
- Have headwinds (e.g. structural or cyclical)
- High share valuations; and
- A catalyst for change
Often, these kinds of companies can be found in cyclical industries, such as the resources sector.
Time to SELL resources?
According to one Bahamas-based chief investment officer it could be time to short sell resources companies.
The above chart shows the S&P/ASX 200 Materials (ASX: XMJ) index in 2016, which includes names like BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).
According to Fairfax Media, Atul Lele, the CIO of private wealth business, Deltec, believes that the Chinese stimulus that has been propping up global commodity prices could be coming to an end.
"Don't say that resources are a value play because they're absolutely not," he was quoted as saying.
Mr Lele believes that the commodities market has already priced in the huge stimulus implemented by the Chinese government, which he estimates is worth $US3.6 trillion (with a 't') spread over a number of years.
Time to short sell BHP, Rio Tinto and Fortescue?
BHP, Rio Tinto and Fortescue shares are heavily reliant on the iron ore price to keep their share prices riding high. In turn, with the Chinese market accounting for more than 70% of seaborne iron ore (according to mining.com) the commodity price is dependent on China's spending and growth.
Leading into 2016, some pundits (myself included) expected iron ore prices to keep falling into the $US 20 per tonne range. However, iron ore recently traded above $US 80 per tonne. Unsurprisingly, iron ore leveraged shares have rallied.
Foolish Takeaway
Shares of companies in Australia's resource sector are increasingly dependent on the Chinese market. In my opinion, while shares have performed very well in 2016, I expect 2017 will produce a far lower return. I wouldn't go so far as to short sell any of the big three producers, but I'd certainly consider selling now and re-purposing the funds in other, more attractive shares.
