With the benefit of hindsight, just one good trade a decade would be enough to make us all wealthy men..... buy gold in the 70’s, Japan in the eighties, tech stocks in the 90’s and property this decade. Of course, you would have to take profits at the right time in all of these asset classes - so that’s getting it right twice!
However, these trades look relatively easy to identify when looking back through the mists of time. Frequently, the best entry point would have been just before the turn of the decade, so are there any "obvious" trades staring us in the face as we roll into the next ten year period?
Colleague Jackson Wong thinks that the Chinese Renminbi (also known as the Yuan) fits the bill. The currency continues to be pegged against the US dollar, with only minor revaluation over the last few years. But can this last? The economic fundementals for a RMB revaluation are compelling. Here are Jackson’s arguments:
GDP: China is racing ahead (expanding); US is slowing down (contracting). Implications: Chinese economy is inflationary; US deflationary. Thus, theoretically, the RMB should go up against Dollar, as both economies adjust. For example, higher inflation -> higher interest rates. Attract capital inflow.
But, the RMB is pinned down. Because of the peg, when USD declines, RMB declines. To shed some light on where the RMB might trade at if not controlled: the Brazilian trade weighted exchange rate is up almost 30% against USD this year.
For the US, a depreciating USD is logical since the country needs to increase exports and reduce imports. So Bernanke prints like mad. However, for China, to maintain the peg results in massive credit creation (via stimulus). But does China really need so much stimulus? Excessive credit creation creates one big problem: Inflation. In China, inflation is taking place in both assets (property and stocks) and consumption sectors. Also, excessive credit lowers returns on projects and increase bad loans.).
To control inflation, China may well need to revalue the RMB at a higher level over the next few years.