2011 crowded markets , page-15

Here's a personal theory about why the aussie market is currently lagging the rest of the world, especially since March 2009. A lively debate is would be welcome during these boring market days.

By April 2010, the aussie market regained 50% of the GFC crash whilst Wall St and Europe regained much more. Now it's December 2010, Wall St and Europe have surpassed their April highs whilst Australia is no where near that level.

Every market transaction is a buy and a sell at the same time. Just as in forex trading, when you buy one currency you are selling another currency. A fruit shop owner buys your dollars with his bananas when you buy bananas with your dollars.

We all know about the inverse correlation between USD and equities - dollar strengthens, markets fall and vice-versa. Now try and look at it in the way of forex - when someone buys shares on Wall St, they are selling USD at the same time, ie long equities and short USD. It's a two way transaction every time. So while it's true that to buy aussie equities you need to have/buy AUD first, it's also true that you can buy AUD by selling your aussie equities, and when you buy aussie shares you are selling AUD.

When a currency gains so much strength that it starts making historic highs, it has great purchasing power. Put simply, a strong currency means cheaper goods, and that includes shares. So in theory, the great buying of AUD lately means the value of anything else valued in AUD should fall or remain cheap, including shares. Australian shares haven't risen as much as foreign shares because not as many AUD are needed to buy those shares.

Only when AUD is back in a lower trading range will our market rise and catch up with the rest of the world. Either the buying of equities will help short AUD, or, a less stronger AUD will mean more dollars are needed to buy one share, ie higher share price. There's no guarantee or indication that this will/won't happen. That remains to be seen and the implications to inflation, interest rates and the rest of the economy can be debated indefinitely.

Of course none of this should be confused with day to day market correlations. AUD will fall and rise with markets in the short term for sure. What I'm talking about here is more general and longer term in nature.

To make further sense of this look no further than the fortunes of the Nikkei over the last 20 years whilst the yen has powered on.

10c