“Everyone thinks the Australian dollar is overrated, but it won’t crack this year,” says the chief economist of State Street based in Boston, Chris Probyn, giving Australian investors a great opportunity to buy overseas assets.
“On purchasing power parity, everyone thinks the Australian dollar is overrated. But markets can stay irrational longer than investors can stay insolvent,” he says.
Probyn predicts there will be a slight acceleration in the Australian economy in the second half of the year, predicated on China, and that the Australian dollar will stay strong until the US Federal Reserve stops quantitative easing.
“This is a good opportunity for Australian-based investors to buy a few overseas assets. A strong currency gives you an opportunity,” he says. “Emerging market equities would be a big trade in emerging markets currencies. It’s worth thinking about.”
Repeating the mistakes of the 1920s
State Street employs three economists, one emerging markets specialist and two who specialise in the G8, which is the G7 plus Australia because of State Street’s presence here.
Probyn’s outlook for 2013 is for 0.25 per cent global growth, driven by a 0.5 per cent growth in emerging markets.
His economic outlook for developed markets is zero growth, which he partly attributes to fiscal policy decisions.
“We have reinvented economics, when the economy is weak we stop government spending, it is a failure of policy and we are repeating the mistakes of the 1920s,” he says.
The current equity rally, according to Probyn, is partly attributable to a certain psychological behaviour. “People have worry fatigue; they are tired of worrying about the same things.”
He says the equity rally is not predicated on a shift in economic performance and that it would be reasonable to say the market may “pause for thought”.
Probyn says the move from fixed income to equities has been fostered by some of the “economic areas for concern” being eliminated.
These include the avoidance of a hard landing in China, a disorderly breakup of the euro, proactive policy responses in Japan and the avoidance of the US fiscal cliff.
“These have all been ticked off,” he says. “But still growth is not great. The fourth quarter earnings reports have been good, with the notable exception of Apple, so there is some fundamental support for equities. But there is no fundamental upshift, so the size and speed of the rally is a little surprising.”