Contrarian investors are thriving in a year highlighted by economic and political disruptions across the globe that once seemed unlikely - such as Brexit, Donald Trump's election as U.S. president, and OPEC finally agreeing to cut oil output.

In that environment, a simple contrarian​ investing strategy has produced a 31% return so far in 2016, versus about 11% for the S&P 500 Index (SPX), according to the December 15 Global Equity Strategy report from Citigroup Inc. (C). This has been the third-best year for that strategy since 1998. Its strong performance in 2016 was driven mainly by a rebound in commodities-driven stocks, including those in the mining, metals and oil sectors.

The Strategy

Taking the 250 largest stocks in the MSCI All Country World Index (ACWI), the scheme creates a portfolio for the upcoming year that has long positions in the previous year’s ten worst performers and short positions in the ten best performers. It bears a fundamental similarity to the longstanding Dogs of the Dow or Dow 10 investing formula that anticipates rebounds in the prices of the ten worst performing stocks in the Dow Jones Industrial Average (DJIA).

Contrarian Picks For 2017

This issue is whether that same strategy will work next year. According to the formula, contrarians would buy eight health care stocks that have declined by between 17% and 43% so far in 2016. These include: Teva Pharmaceutical Industries Ltd. (TEVA), Allergan PLC (AGN) Novo-Nordisk A S (NVO), Gilead Sciences, Inc. (GILD). McKesson Corp. (MCK), Eli Lilly & Co. (LLY), Novartis A G (NVS) and Bayer AG (BAYRY). Rounding out their ten contrarian buy picks are CVS Health Corp. (CVS), classified under consumer staples, and U.K. telecom provider BT Group PLC.

As for stocks to short in 2017, seven of the ten are commodities plays. Glencore PLC, BHP Billiton Ltd. (BHP) and Rio Tinto PLC (RIO) are global mining and metals companies that had been among the bullish bets for 2016. Four energy stocks are among the shorts: Halliburton Co. (HAL), Canadian Natural Resources Ltd. (CNQ), EOG Resources Inc. (EOG) and Pioneer Natural Resources Co. (PXD). Three information technology stocks round out the list of shorts: NVIDIA Corp. (NVDA), Applied Materials Inc. (AMAT) and Hewlett Packard Enterprise Co. (HPE). These ten stocks have risen between 53%  and 214% so far in 2016.

Role of Market Turning Points

Citigroup's Global Strategy Team writes that "Strong performance from contrarian strategies usually occurs around major global market turning points," either down, such as in 2000 with the bursting of the dotcom bubble, or up, as in 2009 as the market emerged after the financial crisis. Then in 2016, there was the big upward turn in commodity prices.

Cautionary Note

The Citigroup report offers a warning that "simplistic" contrarian strategies can produce more failures than successes. While 2016 was a banner year for the formula, it produced losses in 11 of the 17 years prior to 2016, including 5 of the last 6 years. Citigroup's macro experts expect continued trends towards higher oil prices, higher yields on U.S. Treasury Bonds and higher stock prices in 2017. "That would imply that contrarians will revert back to their usual underperformance over the next 12 months," the Global Strategy Team says.