Last year has fulfilled general expectations for the
Australian Dollar and economy and for the global economy.
Although the Australian Dollar - high against the US Dollar -
slightly exceeded expectations, our limited hopes back in January have been
almost exactly met.
So, what exactly did we expect in 2011? Overall a continued
battle between risk-on and risk-off, with the start of the year still driven by
the positive momentum of QE2, driving global risk asset markets higher,
supporting commodity prices and weakening the US Dollar. All three of these
factors are supportive of the Australian economy, Australian equity markets
(which are now dominated by resources and the banking sector to an unprecedented
extent) and the Australian Dollar.
However, the events of Q3 last year (which had really started
to surface almost six months earlier) showed us that what the carry trade gives
it can also take away. The sharp snap back below parity was a stark warning of
what can happen to the AUD when the problems that have dogged the global economy
for over a decade finally flare up in a way that short term measures can no
longer smooth over. This should be seen as a warning shot with downside risks of
the Aussie sliding below 65 cents in extremis (although the jury is split as to
whether that’s more likely in 2012 or 2013).
Further US and European QE and interest rate manipulation,
such as the Fed’s much vaunted ‘twist’, undoubtedly bought more time, delaying
the grim days of reckoning, whilst making the ultimate problems more severe.
2012 still seems the likeliest ‘red alert year’, although noted economist,
Professor Nouriel Roubini, believes that the central bank masters of the
universe can buy another year before reality bites.
The challenges facing the global economy largely stem from
the inefficient allocation of resources and wealth across developed economies as
a whole over the last three to four decades. This created the unprecedented debt
bubble that hangs like a dark cloud over the global economy from America to
Zimbabwe.
The most widely read economic book of 2010 was 800 years
of debt, why this time will be different by Reinhart and Rogoff. It mainly
concludes that this time will not be different - the bursting of the European,
US, UK and Japanese debt bubbles will inevitably lead to severe global
depression from which there will be few if any places to hide. The expectation
is that debt crisis 2012-13 style will initially see the following result:
• A global depression
• A collapse of global equity and property markets
• A liquidity crisis
• A flight to US Dollar and US T-bills
A second phase of the crisis is likely to see the decoupling
of economies like ASEAN which has low levels of external debt and healthy
balance sheets as a result of the post-1997 period of adjustment.
The gorilla in the room remains China whose politicians have
yet to decide how to handle the imminent slowdown. Will they take pain on the
chin and encourage a period of adjustment as a pre-cursor to further growth? Or
will China’s politicians copy Western mistakes of ‘extending and pretending’
putting off the inevitable but making it much worse in the process.
China, the last driver of global growth, holds all the aces
in this round table discussion. What we expect with a reasonable degree of
certainty is that the onset of crisis will provoke the fall in AUD, referred to
earlier and a sharp correction in the ASX, where a ‘three handle’ seems
inevitable. We thought we could have got there in the last couple of weeks of
2011. Any global slowdown will seriously depress commodity prices, further
squeezing the Australian currency and economy.
A sustained correction in Australian property prices - now
the singly most overvalued property market - will take place over several years.
Although the severity will vary from region to region we expect WA along with
the Gold and Sunshine coasts to be the worst affected. Residential properties
could ultimately see falls exceeding 30 percent.
Australian currency, property and equity markets might not
revisit recent highs again for many, many years. This is not a typical, cyclical
event - the global economy, the Australian economy and global and Australian
equity and currency markets are undergoing a seismic shift that has been coming
down the line for over a decade. It has been looming larger and closer since the
credit crunch and Global Financial Crisis but it is now inevitable.
The only real questions are how quickly will each part of the
world recover and what will the world look like afterwards? China’s longer term
growth potential remains the key to Australia’s bright, long term future but for
the next few years the lucky country’s resources-dominated equity market,
overheated housing market and carry-dependent currency appear to offer meagre
rewards in return for a risk element that goes off the scale.
Expat Aussies with a range of international currency,
investment and deposit choices can position themselves very nicely to make the
most of the opportunities that will inevitably arise from such dislocations much
more easily than the countrymen that they have left behind back home. Expect
periods when the best results come from staying well away from Australia’s
equity and property markets, holding very little more than an emergency reserve
in AUD and working in the faster recovering, less indebted markets of South East
Asia.
Aussies who can do that might turn out to the really lucky
ones! Advance Australia? If it can stop still they will have done well.
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The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the
above article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of reading the
above article. For more information please contact Graham Macdonald on
[email protected] |
