Australia as I predicted: 2

Here is my email to my friend this May. My students for the global macro investment class were pretty good this semester but they did not figure out the key geographic implication about Australia. Live and learn about everything every day. That is the way to successful global macro strategy part. Execution is still a separate set of challenge.

“The key is that China will slow down dramatically; another round is coming this winter. Aussie $ has been pushed up by mining sector, which has suffocated manufacturing, tourism, other exports, and retails. It has pushed housing price much higher, due to both Aussie $ appreciation and price appreciation in Aussie $. This is the classic Dutch disease (http://en.wikipedia.org/wiki/Dutch_disease). When China slows down more, the mining sector will be hurt most. But what will help OZ is the inevitable currency depreciation. Unlikely Spain and Ireland, OZ has its currency. When depreciation happens, it will help the mining sector a bit. But the reality is that the mining sector will be squeezed by both China’s slowdown and the large supply brought on stream from the large investments made by mining companies since mid 2000s. The profits of those sectors will be hurt. But the depreciation will clearly help the other sectors that were originally hurt by the Dutch disease, especially the tourism sector.

What’s interesting in OZ is the clear geographic separation of mining and the sectors that have been hurt by mining boom. Mining is mostly at Queensland (Brisbane) and West Australia (Perth), whereas those hurt sectors are in New South Wales (Sydney). So if you can shift Aussie $ to USD for the short term until Aussie $ drops to about USD .8 to .85 and then start to shift back (it could drop more, but this would already make you 10-15%), you can then use the money to buy, for example, commercial real estate related to those hurt sectors in Sydney. Since OZ  personal debt level has been already high, and housing prices are already high, people probably won’t buy new houses right away. But the relative boom in NSW will help the job opportunity there and the rental property market will become or keep being warm if not hot.

In HK, one can easily open foreign currency accounts and shift between accounts. I would imagine OZ banks do that too. So it may be easier to move Aussie $ to USD and then back than you imagine.

We have bought quite a few properties in the US since 2011. It has worked out well and will appreciate a lot in the long term. But in the short term, the rental yield is also very high... It would be still a good deal to buy properties in the US. In OZ in comparison, one lacks one of the two legs of the US deals at least, long term fixed rate mortgage with very low rate right now.

These are just executable ideas. To invest in real estate, there are still a lot of details to deal with. You might need to delegate to some property management companies. However, it is not impossible to do the same through stock markets. There will be quite a few liquid stocks that have max exposure to those hurt sectors and NSW and little, if any, exposure to mining and Queensland and West Australia. Long those stocks (and maybe short the mining one opportunistically) should get you quicker one time return. Less hassles than real estate but not sustainable cash flows.”

Note that I have told this to a few friends already since last year.