Jakobsen: Australia Might Be Opportunity Of The Decade

Australia could be the opportunity of the decade, according to Saxo Bank’s capital markets chief investment officer Steen Jakobsen, as global macro trends including a weaker USD will dictate the country’s future.

In a blog published today, Jakobsen said there are still many reasons to be negative on Australia, including the 30 percent collapse in its terms-of-trade – the price of goods between Australia and its trading partners – since the commodity cycle peaked in 2010/11 and soaring household credit to fill in the gap. Also GDP growth in the second quarter only hit 0.2 percent, narrowly avoiding a negative number due to increased government spending.

The iShares MSCI Australia UCITS ETF (SAUS) is down over 16 percent year to date, while the db X-trackers S&P/ASX 200 UCITS ETF (XAUS) fell around 15.6 percent in that time, both in Sterling terms. Hedging your currency via UBS’s ETF (UC72) would have hit you less hard with negative returns of 6.2 percent since 1 January.

On the fixed income side, the one Europe-listed ETF to track Australian sovereign bonds (XCS2) is down 9.6 percent.

However, Jakobsen thinks the USD currency will start to weaken, and China and emerging markets  - Australia's trading partners - will return to raise cheap USD-denominated debt while interest rates are low to keep their economies afloat, as they did after the financial crisis of 2008. Jakobsen said this is the “path of least resistance to higher growth”, especially after the Fed postponed any rate hikes this month.

“Australia and its currency AUD is an excellent proxy for world growth – being long the AUD you are long: China, world growth, iron ore, agriculture, metals and short the USD – the exact things I want to be long right now,” he said.

Jakobsen said there is an equal chance the Fed will cut rates next month as economic data deteriorates, which would weaken USD and "save Australia from the abyss of recession”.

He added that he is personally moving 20 percent of his assets into gold-related investments and will start to increase exposure to AUD currency and the Australian mining sector, as he believes markets are oversimplifying the risk from China.

“I’m the most optimistic I have been on Australia in the last decade but for one reason only: It can’t get much worse!” he wrote.