Ever since Ben Bernanke opened his mouth in late May and mentioned the word “taper”, financial markets have been in turmoil.
Markets of all persuasion – for stocks, currencies, bonds and commodities – did a sharp about-face.
While the short term conniptions have been unsettling, the longer term picture for the US economy – by far the world’s biggest – is looking brighter.
For Australian investors, this couldn’t have occurred at a better time. Just as problems have begun to emerge in China following years of rapid, debt-led investment growth, the world’s economic heavyweight is slowly rebuilding itself after the damage caused by the global financial crisis.
China is our major trading partner while America is way down the list when it comes to Australian exports, and so the China slowdown will have a more immediate impact on our economy.
But the nascent US recovery has already boosted Australia’s economic prospects. By warning financial markets that the great American economic stimulus experiment possibly could be wound back later this year, the US Federal Reserve chairman sent the American dollar soaring.
That, in turn, has sent the Australian dollar tumbling. For the past two years, the Aussie has remained stubbornly high, even after commodity prices began heading south and it was clear the resources super cycle was running out of steam.
That currency strength restrained the earnings of any company that either exported its goods or had foreign operations. It also made life tough for businesses forced to compete against artificially cheap imports.
Those businesses include service companies, which employ the bulk of Australians. Entire industries, such as tourism, have been barely hanging on as foreigners figured Australia was just too expensive.
The weaker dollar will have an immediate impact on Australian business, boosting competitiveness and lifting earnings.
That improvement is likely to be reflected in a stronger stock market performance. And with interest rates at record lows and possibly heading even lower, conditions for business are looking brighter than in years.
During the next few weeks, we will examine investment opportunities as the great rebalancing takes place in the global economy.