A twist from Oliver?

ALL we have heard in the last few weeks is the gnashing of teeth and general wailing as the little Aussie battler has plumbed new depths on each trading day.

Very few if anyone has looked at the upside of the low Australian dollar.

However, the chief economist and director of investment strategy at AMP Henderson Global Investors, Australia’s largest fund manager, Dr Shane Oliver, concedes that while it is a blow to the national psyche, its economic implications are not all negative.

The main downside is, of course, the higher prices of imports and overseas travel.

As Dr Oliver sees it, against this, the slide in the $A has not boosted general inflation to any significant degree and the competitive boost to our exports and import competing industries has already seen the trade balance move to surplus and a real possibility that even the current account deficit may soon follow suit.

Dr Oliver makes a number of observations in regard to the Australian dollar. In June 1901 the $A bought $US 2.40. It now buys around 48c.

The latest plunge is nothing new. It has been happening since time immemorial. It will continue to happen in the future.

It does tend to have cycles and this cycle is one that does appear to be reasonably sharp in its decline.

Dr Oliver estimates that the Australian dollar is currently around 35 per cent undervalued at the present time. He refers to The Economist magazine’s Big Mac index.

(The Big Mac index is the exchange rate at which McDonald’s Big Mac hamburgers cost the same in the US as elsewhere.)

The last time that The Economist calculated this for the $A in April last year, it showed our dollar to be around 38 per cent undervalued against the $US. Since that time our dollar has fallen a further 15 per cent, which would leave it around 50 per cent undervalued.

The cheapness of the $A versus the $US is highlighted by the fact that our trade balance is rapidly improving while their’s is not.

At some point something has to give and the $A will spring back and the $US will decline.

When this will happen is the big issue for contention. A key driver of the cyclical variation in the $A has always been the outlook for growth in industrial production.

All the forecasts from the key players in this area are for declining world growth rates.

The OECD and other interested parties have consistently said over recent months that the world is not going to grow at rates that it has in the past.

Our economy is still seen as a commodity currency.

We still provide a vast amount of resources to the rest of the world. The slowing of world growth means that the demand for our resources could decline.

There is little that we can do about this factor.

In terms of Dr Oliver’s outlook for the $A, he makes three points.

The first of these is that further downside is possible near-term but with the central banks around the world moving to stimulate growth he feels that we must be close to the low point in the $A.

From a contrarian perspective the fact that bearish sentiment on the $A is now so pervasive is a good sign.

Secondly, Dr Oliver suggests that the extreme undervaluation of the $A would suggest that it is still reasonable to expect a solid recovery on a medium-term view (once the negative cyclical factors abate).

Finally, Dr Oliver points out that the very long downtrend in the $A should not be ignored.

It is a salutary lesson that investors in the markets need to diversify their investments to ensure that they have a reasonable exposure to offshore investments.

Strategically, this is an important lesson to be learnt.

We have said fairly consistently in this column that we here in Australia represent a very small proportion of the world market.

We should not be ignoring the rest of the world in our portfolio deliberations.

Our levels of share ownership in this country are among the highest in the world.

Unfortunately, the vast majority of these new shareholders to the market own one or at best two parcels of stock.

This is a portfolio that will have the full impact of an Australian recession impinging on them.

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