Divergent view of Australian economy between domestic and foreign investors

September 5th, 2010

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Back in If the Australian economy ?booms? further, how is it setting the stage for a bigger bust later?, we wrote that

? as Australian-based investors, we are looking into increasing our allocations to investments that have greater exposure overseas

Increasingly, foreign investors seem to be concurring with our outlook. For example, as we wrote in What do overseas property investors see that Australian property investors don?t? foreign investors are getting more nervous about Australia?s housing market.

As this article in The Australian reported,

The Weekend Australian spoke to senior traders in New York, London and Hong Kong to gauge the appetite for investing in Australia. The overwhelming response was that global institutional investors are wary, despite the economy having emerged as one of the best performing in the world and avoiding a recession.

In fact, the debt market is predicting a small chance of interest rates cut next year. Currently, financial markets is pricing in a 40% of a rate cut of 0.25% by the first half of 2011. You can be sure that if the RBA ever cut rates, it will be in the context of bad news in the economy. As we wrote in What will happen if RBA cuts to zero?,

If Australia?s interest rates ever reach zero, it will happen in the context of a hard landing or even a depression.

Yet, on the other hand, forecasters in Australia are expecting that rates will continue to rise in 2011. For those of us residing in Australia, it is very clear from observing the mainstream media reports that the mood is pretty optimistic.

Since foreign investors have less of a stake in Australia than domestic investors, they will have the attitude of shooting first and asking questions later when they see trouble. That will translate to volatility in the AUD and stock market. That in itself can become a self-fulfilling prophecy.

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