Growth hopes built on muddy ground

First Quadrant’s director of research, Jeppe Ladekarl, would have been pleased by the recent falls in the Australian dollar.

I was yarning to Laderkarl last night and he believes that markets are under pricing risks over a wide area but, in particular, are under rating the risks to commodity currencies like the Australian dollar.

First Quadrant, which has $18 billion under management, regularly shorts the Australian dollar.

Ladekarl says most global markets, including shares and currency markets, are assuming that the liquidity measures being undertaken by central banks will trigger world growth.

There is no certainty that this will happen. There are few global precedents for the current liquidity injections so there is not the same stimulation predictability that we experience with interest rate reductions.

In the US most of the rewards of the stimulation have gone to those who own shares but gap between middle to lower income America and the US high wealth areas has been widening.

If anything, the stimulation may be widening that gap further because rises in share values provide limited boosts to middle and lower income people. They are much more concerned at the effects of job cuts as US government expenditure is reduced. Until consumers start spending, the stimulation will not work as the market expects.

In Europe the overall uncertainty has a similar affect.

In Australia I believe we have not fully appreciated the impact that higher taxes and lower government spending will have on people in lower and middle income groups. ANZ chief Mike Smith says that lower interest rates have run their stimulation race (KGB: ANZ's Mike Smith, May 2). Smith believes certainty in Canberra will do the trick. He is probably right but assuming Tony Abbott comes to power he has a lot of nasties to announce as he tackles the Canberra mess. Smith is assuming a strong China and global growth.

But if First Quadrant is right and there is a bigger chance of low global growth (including China) than the market anticipates then Abbott and Co may face further falls in mineral taxation revenue. Add to that the repercussions of large numbers to be retrenched from the mineral construction projects, including suppliers, which are set to take place within two years.

But Australia will have the boost that comes from a much lower Australian dollar. Meanwhile Jeppe Ladekarl favours defensive assets in US dollars.