Brokers are starting to wake up to the fact that the mining boom is only going to benefit the miners. The rest of the economy is likely to struggle, not least because Australia’s government finances are strong, national debt is low. Why does this matter? Because it means the Australian dollar is likely to remain high against the Euro and the greenback. The low interest rates in Europe and the US is a symptom of the poor state of their state finances, after their governments got the worst hospital pass in history from the banksters. Australia certainly has its problems, such as the Australian banks’ reliance on offshore funding and soaring household debt. But Australia’s government debt is positively AAA compared with much of the developed world and that has to have an effect on perception of the currency. Even if there is a big housing bust it give the government more options than was available in the United Kingdom, for instance.
It means the two speed economy is on the way to becoming institutionalised, and that will really affect the relative performance of the different sectors. Macquarie has this to say, for instance;
It’s crunch time for the Australian economy. The long promised boom in the economy is supposed to have commenced, but there are few – if any – signs of it in the data that have been released over the last few months. Indeed, what the first half of 2011 has highlighted is that the mining investment boom Mk II is not sufficient to carry the economy by itself. The evidence now strongly suggests that the impact of the high A$, the current level of interest rates and fiscal contraction is beginning to overwhelm the positive influence of stronger resource sector spending.
The other important development in recent months was the RBA conceding that the economy is not nearly as strong as it had expected. We always thought that the key downside risk for growth in 2011 was if the RBA kept tightening policy simply on the basis of its strong growth forecasts rather than evidence that activity had accelerated. That risk now appears to have receded, and while steady interest rates are obviously much better for the economy than ongoing rate hikes, it is not until interest rates fall – and the exchange rate declines – that conditions will improve dramatically. And that looks to be still some way off.
What will provide a floor for Australian equities is the inflow from super funds. Deutsche Bank is noting that Australian super funds are not using the strong $A to purchase off shore and they are pouring money into the stock market:
Superannuation funds have been the main contributor, injecting $13bn of new money into the market in each of past 3 quarters. Outside of domestic equities, super funds still prefer cash, channeling ~$5bn per quarter into deposits over the past 1½yrs. This continues despite cash holdings being elevated (15% of assets for the past 3yrs, compared to <10% previously).
Weight of money arguments about stocks are always questionable, but in this case they do seem to provide some sort of floor to the non-mining sector of the market. The bulk of that foreign money is going into the resources side of the market, which suggests that will be more volatile, but have hgher rewards.