After several years of underperformance, 2016 was the year contrarians made a mint.
Thanks to an unexpectedly strong rebound in commodity prices, a contrarian global stock-picking strategy delivered 30 per cent in 2016, the third best year for such a trade since 1998, according to Citigroup.
![This year has been the first turnaround year since 2009.](/web/20161221123504im_/http://www.smh.com.au/content/dam/images/g/t/d/w/r/z/image.related.articleLeadwide.620x349.gtdwab.png/1482132447818.jpg)
The last time contrarians had such a successful year was 2009, and that came nine years after the last good year for the strategy.
"The equity industry's affinity with momentum brought them unstuck in 2016," Credit Suisse analysts Hasan Tevfik and Peter Liu said in a note to clients.
"Momentum strategies, like buying those stocks with rising prices or where earnings per share trend higher, perform well in most years. But they can perform horrendously in turnaround years."
Energy and raw material sectors the big winners
Around the globe, the energy and raw material sectors experienced the best growth, after putting in the weakest performance last year.
Iron ore prices have climbed steadily since hitting 10-year lows in December 2015, boosting local mining stocks. Other key commodities, including oil and coal, have also posted remarking turnarounds.
The S&P;/ASX 200 index subsequently rose after falling to a three-year low in February, led by resource stocks. Meanwhile, yield-sensitive sectors, which had in the past years benefited from a rally in global bond markets that took yields to rock-bottom lows, were sold off after yields picked up around mid-year.
Citi analysed a simple contrarian strategy of buying last year's 10 worst-performing stocks out of the top 250 largest equities across 23 developed and 23 emerging markets, including Australia, and selling the 10 best-performing ones.
They found being bullish on a commodity rebound produced an average share price gain of 41 per cent per relevant stock, led by BHP Billiton and Rio Tinto.
Not every contrarian strategy worked, however, as a bear call for a peak in FANGs (stocks of tech giants Facebook, Amazon, Netflix and Google) didn't materialise.
Many of the contrarian picks in Citi's sample portfolio also performed better after Donald Trump's victory in the US presidential election, the analysts noted.
Next year, a contrarian strategy would focus on healthcare while cyclicals such as commodity-related stocks had naturally become bear picks, Citi said.
The analysts noted this wasn't the house view, as Citi remained bullish on cyclicals.
Contrarians would need a slowdown in the global economy for the strategy to outperform in 2017, they said. "We think it is too early to make that call, although watch out for some early-year rotation."
Still, it is worth noting that this year's top 10 best performers among the ASX 200 are all mining companies or companies serving the mining industry, while healthcare stocks are among the worst, setting both sectors up for a contrarian position.
Credit Suisse agreed that resources stocks were turning into a contrarian pick, noting that some brokers were, once again, shorting Fortescue, that is betting on falls in the shares, which have risen about 250 per cent this year.
Despite this year's success, turnaround years with big payouts are not enough to make up for years in which contrarian strategies lose.
The cumulative payout for contrarian stock picks since 1997 would be around negative 80 per cent, Citi found.
One of the reasons for poor performance is that turnaround years are uncommon. For momentum investors, they are also hard to pick.
"By definition, consensus will miss turning points," Mr Tevfik and Mr Liu said. "The good news is that turning point years don't happen that often. Perhaps the consensus picks will perform better in the year ahead."