Photo: Wikimedia Commons
Goldman Sachs Asset Management Chairman Jim O’Neill just returned from East Asia, and he has a new trade idea:Short the Aussie dollar, long the Mexican peso.
The reason? China.
He explains in his latest Viewpoints note:
I had given an interview to a prominent local financial newspaper that was published just as I arrived, suggesting that Australia had to deal with China’s transition from an era of “quantity” to one of “quality” and that I thought Australia wouldn’t perhaps benefit so much, and in the search for net winners and losers of the new China, I didn’t think Australia was a likely net winner. Philip Moffitt, our senior fixed income portfolio manager for the region, said at a couple of shared events on the trip that his favourite trade was “long the Mexican peso and short the Australian dollar”. I find great sympathy with this view thinking about the new China.
Mexico has managed to dodge the effects of the global economic slowdown.
O’Neill discussed further the negative sentiment toward the Aussie dollar:
…during two intense days in Sydney and Melbourne, I don’t recall meeting one person that appeared to be bullish for the Australian dollar. In that sense, it was quite striking how much Australian investors are already thinking about the new China, and there is widespread belief that a slowing in Australia’s terms of the trade benefits of yesteryear are underway. It was less clear whether export volumes were going to head the same way as prices and many cited that as of yet, they haven’t.
Regarding China transitioning to an economy based on “quality,” O’Neill expands on that too:
I mean, first and foremost, a China in which the leadership has deliberately decided it doesn’t want to achieve 10% plus real GDP growth anymore, and one that is happier with 7 to 8%. I mean a China where we should respect more closely than in the past what the five-year plan outlines in terms of priorities; and in this regard, one in which private consumption becomes a bigger share of GDP at the expense of exports and state-backed investment. One in which income differentials decline – greatly because of higher incomes for the less beneficial, but also one where the highest find it more likely that the income has to be earned rather than gifted. A China that is genuinely focused on energy efficiency and alternative energies, and crucially, one that is moving towards more creativity and innovation and with that, some more individual freedoms.
Read the whole note at GoldmanSachs.com.