Friday, February 6, 2015

Australian stock market cheap in US dollar terms

The recent strong rally in the Australian stock market has been near-universally attributed to a 25 basis points drop in the overnight cash rate to 2.5%.  I don't buy this.  In fact, since September last year, the Australian dollar has depreciated much faster than stock market indices so the Australian stock market, valued in US dollars has got cheaper for US investors*.  Real after-tax interest rates have barely changed and are not driving investment trends at present.

At the same time those Australian mining and agricultural exporters faced with declining commodity prices but selling their outputs in US dollars will now start to do much better than would have been thought possible even 6 months ago.

My guess is that foreign investors withdrew from the Australian market fearing capital losses associated with an expected devaluation of the Australian dollar - one that was even promoted by the RBA - but that now the Australian dollar has depreciated the foreign funds are rolling in**.

With the usual caution that goes with all my forecasting - for over a decade in the 1990s I said the Australian dollar was undervalued! - I am reasonably confident that the ASX will do well in the remainder of 2015, particularly starting in the 4th quarter. I also think the economy will do much better than expected from late 2015 with falling unemployment and moderate economic growth.

One of the most irritating things about Australian economics discussions is the overwhelming sense of dread and pessimism concerning the disaster around the next corner.  To the extent we can talk ourselves into a bad outlook we do our best to do so.  But even regarding such adverse impacts I think the Australian economy is strongly placed to recover as we move through 2015 and beyond.

* The Aussi dollar has fallen from 93 to 78 cents or by about 16% (here). The ASX100 has wobbled quite a btt from mid-September 2014 to today it has grown from about 4500 to 4850 or by about 8% (here).

** The correlation between Australian and foreign stock market indices is revealing - Australia's stock market health is driven by that internationally (here). 

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