Investors need to prepare for a multi-notch credit downgrade in Australia, says Andy Seaman, partner at Stratton Street Capital.
The London-based hedge fund manager runs $1.6 billion across seven funds. Seaman oversees its fixed income strategies, including a renminbi bond fund.
In an interview with AsianInvestor*, Seaman explained that the way the firm looks at the world is to split it into creditors and debtors.
It differentiates the two using net foreign assets as a measurement. In 2009 it came up with a list of 12 indebted nations that it warned were in trouble. Of these, Iceland has already blown up. It also had Portugal, Greece and Spain on its list.
And Australia was also included, which Seaman notes has been running a current account deficit for 30 consecutive years. “People will be shocked when it [Australia] gets a multi-notch downgrade over the next few years,” he warned.
Seaman notes that because of its deficit Australia has had to finance itself with capital from abroad. "Eventually foreigners will be a very large part of the economy and that’s absolutely fine, provided they are willing to maintain those positions,” he adds.
“However, yields have come down and you now get paid more yield for owning Chinese government bonds than you do for Australian government bonds.”
He notes, too, that Australia’s banking system is very large relative to its GDP, which is often a cause for concern. “A bank’s financial position looks great if it lends to a big mining project, but a mining project can get cancelled overnight, suddenly creating an imbalance.”
Seaman admits that he “seems to be an island of my own” when it comes to his views on Australia. But he points out, too, that Stratton Street’s Wonda Bond Currency Fund shorted the Aussie dollar in 2008, when the currency fell 10% in a single day.
“It wouldn’t have fallen that much if it had been based on strong fundamentals,” Seaman reasons.
Asked more broadly whether he feels emerging markets have unfairly treated by investors, he replies: “For us, the concept of developed versus emerging markets is a false one because there are some perfectly strong developed countries and plenty of other weak ones, such as Spain.
“Equally there are some strong creditor nations in the EM space, such as China, and some very weak ones, like Ukraine and Turkey.”
*A full version of this article will appear in the April print edition of AsianInvestor magazine.