After five decades, the Institute for Financial Analysis has polled its members, who now no longer believe in efficient markets – or, more specifically, that share prices do not reflect all available information. Does this mean an end to the random use of Greek letters in financial jargon? What should a rational investor do without his trusty Capital Asset Pricing Model? Is the DCF dead? How can one function in these volatile times without a simplistic framework?

We view this apparent mass epiphany as arrant nonsense, verging on sacrilege. The world is awash with financial information, dispensed with formidable rapidity to a very wide audience by Bloomberg, Reuters, CNBC, email and even Twitter for those of a trendier persuasion. CEOs cannot scratch their noses without it being made public and any informational advantage that an investor can claim is likely to be either fallacious or illegal. Where the academic fraternity has gone wrong is in assuming that all participants interpret new news in the same way. This has never been the case and it most certainly is not now. Investor psychology will always influence how news is reflected in market pricing and at times of panic and extreme bullishness will twist data to extraordinary degrees to suit current positioning. Just look at the changing response of markets to capital raisings over the last six months. These episodes are always the most fertile for active investors who can adopt some degree of objectivity in their process. The ‘art’ of fund management is simply discerning the balance between what type of economic outcome is reflected in stock prices and what is likely to eventuate based on history or other guides – and one must always be cognisant of the old adage that history may not repeat itself, but it does tend to rhyme. The panic of last year was an unpleasant episode to go through but sowed the seeds of huge pricing anomalies. The aftershocks of the financial crisis are likely to continue to provide a lot of opportunity to add alpha over the next six months.

The incumbents of Canberra are probably as popular in Beijing at the moment as Gordon Ramsay is in Australian news studios. Having rebuffed the bid for Ozminerals’ Prominent Hill, they will also be held culpable in Chinese eyes for Rio’s (partially) commercially driven snub to Chinalco, which was then made much worse by the announcement of the Rio/BHP iron ore joint venture, neatly creating a duopoly from the prior three player market. The fig leaf covering this clear anti-competitive move is a commitment to keep marketing separate. We would not blame either the European competition authorities or their equivalent in China for hallucinating over squadrons of flying pigs before they took this commitment at face value. Yet the Chinese need minerals and cannot afford to throw all the toys out of the pram and walk away. We expect the response to be a ratcheting up of interest in Africa and South America together with a focus on smaller Australian deals which fly under the political radar screen. One that particularly intrigues us is a 50% stake in Lynas being taken by China Non Ferrous Metals. Lynas has the only significant commercially viable rare earth deposit outside of China, which has until now had a virtual monopoly of these essential metals. You may never have heard of Neodymium or Praseodymium, but rest assured your PC, iPod or hybrid car would not function without them. Allowing the Chinese to keep their stranglehold on this market is clearly anti-competitive (although potentially very advantageous for Lynas shareholders), but will not be seen as a political liability in Australia, especially as it creates jobs. We also expect a wave of deals in junior iron ore miners as Chinese steel mills look to create some tension in price negotiations and the fund has added to its exposure here as well.

The move away from cyclicals and into cheap defensive and/or growth names has continued apace this month, a phenomenon observed in most markets. It seems increasingly consensual that a major restocking cycle is underway and while this may have another quarter or so in it, the markets have clearly priced some of this extra improvement already. How they will react to the inevitable slowdown in activity once the supply chain has been re-filled is unknown, but we have a sneaking feeling that straight line extrapolation of data points has become an essential analytical tool, fuelled by a long period of economic expansion. It is unlikely to be as useful over the next few years as economies work their way out of the debt mountain and perceptions of the inflation dynamic fluctuate. The companies themselves are wasting no time replenishing their funding and equity issuance is running at unprecedented levels, recently augmented by a few IPOs and an increasing number of opportunistic placings from insiders. This again points us towards the unloved defensives with no need for new capital and share prices too low to prompt insider selling.

The inadequacy of the Western World’s pensioning provision has recently been highlighted by several high profile closures of final salary pension schemes and the (politically unpalatable) realisation that public sector retirees are entitled to fantastic and completely unaffordable deals which will be in large part funded by current generation private sector workers – who will become a rapidly shrinking part of the overall population as fertility falls and longevity rises. It will finally dawn on the Great Unwashed that they need to save more – a lot more. The Governments will need to slash spending and raise taxes. This is clearly a toxic combination as far as growth is concerned and will speed the accession of savings-rich eastern economies up into the Premier League of developed countries, while requiring their own consumers to spend more. For anyone in the West who does not want to retire in penury, long term investing in Asia looks more and more essential.

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