Be cautious on 'fashionable' trades

It is currently very fashionable to be bearish the Australian dollar; especially since the Australian dollar has underperformed the US dollar by 17% over the past 9 months. As a result, one of the most crowded trades at present is to be long off shore earners such as CSL, Resmed, Brambles, James Hardie, and Amcor. These 5 stocks have delivered an average total return of 28% since September 2014 whereas the broad market has generated less than 4%. In addition, these 5 companies are currently trading on an average PE of 22x.This is not a place where we want to be positioned. We are mindful that (i) over the past 6 weeks the number of short positions on the A$ has declined by 42% (ii) Chinese economic activity should respond to 3 rate cuts and the wealth effect following a 45% surge in the domestic equity market, and (iii) the price of oil and iron ore are up 41% and 11% from their respective lows in March of this year.