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Mr. Z’s Three Favorite Trends for 2010

Kat Von Rohr (February 3, 2010)

Why This Swiss Money Manager Is Still Buying  Gold, Com-Dolls, and One Smelly Commodity This Year

Originally published in the The Sovereign Society’s Offshore A-Letter

In case you missed yesterday’s issue, it’s guest writer week here in FX University Daily. We’re giving your All-Star currency team a break, and instead turning to some of the other finest financial brains around the globe.

Today, we’ll hear from Daniel Zurbrügg, an Asset Manager out of Zurich.

A long-time money manager, he’s an expert at recommending the hottest stocks, commodities and currencies for his clients. In fact, Daniel has a background as a currency trader, when he traded over 58 currencies professionally.

But more importantly, he has an uncanny ability to tell you what’s coming next in the markets. That’s why we went to Daniel for his biggest forecasts heading our way in 2010…

Daniel: Alright, I’m sure everyone is probably quite busy, so let’s get right to it…

Outlook & Forecasts for 2010

  • Global growth to normalize at around 4% GDP, mainly driven by growth in emerging markets
  • Equity markets will rise another 10%-20% in coming months due to increased corporate profitability
    and operating leverage
  • Re-pricing of risk in bond markets, especially in sovereign debt
  • Short-term rates will remain low for another few months but to rise strongly later in the year
  • Long-term rates will move higher, but more moderate than short-term rates
  • Energy prices will move higher with oil breaking $100 a barrel in the first half of 2010
  • Soft commodities to move sharply higher with upside potential of 30%+ in 2010
  • Gold will consolidate after strong upward move, trading in narrow range in the first quarter of 2010
  • Gold will continue upward trend in second half of 2010
  • U.S. Dollar to move lower, despite temporary upward bounces

As you can see, we’re expecting a rapidly shifting financial landscape to persist throughout the year (as it has since 2007/2008).

Today, I wanted to drill down and focus on just a few major trends that could be immensely profitable for you as the year wears on…

Gold Finds a New Kind of Value in the Wake of a “Once-in-a-Century” Crisis

Gold has recently moved to record levels and it has been one of the best performing investments in the recent past. But should you be concerned about how high gold has climbed recently and take it as a sign that there is trouble ahead for markets?

In my view, the answer is no.

Don’t fall into the trap of believing that gold is expensive at these levels. If you look at gold prices in a historical context, then gold is NOT expensive at all – especially considering inflation and the weakening U.S. dollar.

Also the obvious willingness of emerging markets and their central banks to use gold as an additional way to diversify their reserves will be highly supportive for the yellow metal in the years to come…

Comdollars Will Rule 2010

Our preferred currencies for 2010 remain Aussie dollar (AUD), Norway’s krone (NOK), Canadian dollars (CAD) and Brazil’s real (BRL). We also like the Chinese yuan and the Indian rupee, where we are going to add exposures shortly.

The strong underlying trend towards commodity currencies and countries with economic surplus will, in our view, continue. Most of these currencies have rebounded strongly against the U.S. dollar in the last couple of months (as you can see in the chart below), but, the weaker U.S. dollar was helping here quite a bit…

Comdollars Significantly Outperformed the U.S. Dollar

We still see more downside for the U.S. dollar in 2010, but we wouldn’t be surprised to see some temporary rebounds along the way.

Fundamentally, we are still not seeing any supporting factor for the U.S. dollar. Its role as the world’s number one reserve currency is diminishing. The interest rate differential is negative, compared to most other major currencies. In addition, the U.S. debt burden is huge and growing further.

Although I think that the remaining downside is less than 20% in the near future, I still believe it is absolutely critical for dollar-denominated investors to diversify out of the dollar. You must decrease your currency risk and start making your U.S. dollar exposure smaller and smaller.

The small rebound of the U.S. dollar in recent days wasn’t too surprising. It seems like many U.S. based investors may have been realizing their currency gains before the year-end. However, we think that 2010 will see the structural weakening to continue.

2010s Runaway, Double-Your-Money Trend?

In my opinion, one of the biggest themes in 2010 will be investment in agriculture and soft commodities. Due to the unique supply/demand dynamics of these markets, I believe a return to global growth will result in relatively large price increases.

The Goldman Sachs Commodity Index has recovered to levels around the 500-point mark, compared to about 350 points at the low. This is still far away from the all-time high of 890 points seen in 2008 (when prices were driven by a lot of speculation).

This time things are different…that current prices are very well supported.

There will probably be more speculative money flowing into commodity markets again in 2010. But considering the supply/demand situation, I think soft commodities could easily go up 30%+ in 2010 and still not look overly expensive.

There are various ways to play this opportunity, but investors should look along the whole value chain in agriculture and not just invest in futures or ETFs. Some investments are a more leveraged play on rising agriculture prices – for example, one of my favorite investments is fertilizer companies…

They are – in my opinion – at the “sweet spot” of this development, since the rising world population requires rapidly expanding supply/production to keep up with demand. The amount of land, which can be utilized for the production of many agriculture products, is relatively limited, therefore increasing production and efficiency is crucial.

In anticipation of rising prices and increasing margins for producers, there will be much more money available for fertilizers and crop protection products. Many of the companies in this area are still trading at attractive levels, and I feel that many could double in price within the next 12-24 months.

In short, stay long gold, the commodity currencies, and key commodities (including fertilizer companies) for 2010.

Regards,
Daniel Zurbrügg,
Managing Partner, Alpine Atlantic Asset Management

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