Monday 31 October 2011 8:26 pm

Build profits by going short on infrastructure

PRIME Minister David Cameron has been keenly reiterating the coalition government’s commitment to infrastructure spending. Although he isn’t an open follower of John Maynard Keynes, the idea of this kind of deficit spending designed to stimulate aggregate demand came from the Cambridge economist’s mind. However, traders should stay cynical. Recession left the cupboard bare ­and the pot for picking winners is small. TO EVERYTHING THERE IS A SEASON Booms and busts throughout the ages have concentrated the minds of economists, traders and investors. One such thinker, Simon Kuznets, won the Nobel prize in economics for his postulation of Kuznets swings: 15 to 25 year swings in infrastructural investment. Kuznets linked these swings to demographic changes, but followers have tied these swings to other factors. Either way, Kuznets cycles suggest that infrastructure companies will have it tough for a while yet. It should be noted that not every economist believes in economic cycles. For example, Gregory Mankiw, a noted economist in the classical tradition, thinks economic fluctuations are “irregular and unpredictable”. The jury is certainly still out on whether we can predict these cycles in any meaningful way. But even though Kuznets cycles – as well as Kitchin (40 months), Juglar (7-11 years) and Kondratiev (45-60 years) cycles – are not cast-iron laws, at the very least they are useful lenses, representing momentum and eventual renewal. PAYING DIVIDENDS Infrastructure companies often give out large dividends, so can be the focus of a trading strategy called dividend stripping. Mike van Dulken, head of research at Accendo Markets, says he often sees clients going long on some of the big yielding stocks just ahead of the ex-dividend date. He explains: “This is because contracts for difference (CFDs) pay out immediately on ex-dividend date, unlike shares which pay out on payment date (often several weeks later than ex-dividend).” As such, van Dulken says “if a trader believes shares will recover more than the value of dividend (as shares will drop by this amount on ex- dividend date), they can go long, take cash and deploy it elsewhere, and then wait for shares to recover to a price point where costs are at least covered.” Dividend stripping can be a profitable strategy in the good times, but with the unavoidable readjustments taking place in the economy following the misallocation of boom time investments, it might be a better time to do this in reverse. Although van Dulken cautions that you will “need to expect shares to fall by more than the dividend.” “Practical men, who believe themselves to be quite exempt from any intellectual influence”, said Keynes, “are usually the slaves of some defunct economist.” Although intellectual Keynesianism is alive and kicking, the coalition government isn’t really committed to the fiscal stimulus that Keynes would no doubt be proselytising for if he were around today. That’s the long and short of it.