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Why Now Is the Time to Add Australia to Your Portfolio

March 11th, 2013
in contributors

Money Morning Article of the Week

by Martin Hutchinson, Global Investing Strategist, Money Morning

kangaroobeachThere weren't many developed countries that managed to dodge the worst of the financial crisis, but Australia was one of them.

With strong ties to over six billion emerging market customers yearning to adopt a more Western lifestyle, "The Land Down Under" has been left relatively unscathed.

And with interest rates that are above inflation and a veritable treasure trove of much-needed natural resources to rely on, Australia will enjoy prosperity for decades to come.

Follow up:

Unlike the rest of the West, what's going on there is a bona fide growth story.

In fact, according to the Economist's team of forecasters, Australia's GDP is expected to grow 2.7% in 2013. Among the world's "rich countries" that's only behind the East Asian trio of Singapore, South Korea and Taiwan -- all of which are expected grow at 2.9%-3% this year.

Australia is also doing significantly better than the other Western mineral-rich economy, Canada, which is expected to grow by 1.9% in 2013.

No Helicopters Here

The really good news is that Australia has achieved this success without resorting to misguided "stimulus" policies. Australia's budget is forecast to be in surplus for the 2012-2013 fiscal year -- something completely foreign to most Western countries. And if this gets missed (an election is expected in September, after all) it's likely not going to miss by much.

Australia's monetary policy is sensible, too. The Reserve Bank's policy rate is 3.0%, while Australian inflation has been only 2.2% over the last 12 months. No place other than South Korea is running its finances and monetary policy at this level of soundness.

All this is being achieved with a left-of-center government with a tiny majority, led by Julia Gillard, which has been in office since 2010. While there have been some silly impositions like a new tax on the mining industry, it says a lot for Australia that even a left-leaning government can resist the temptation to play the silly "stimulus" games being played in other countries.

Of course, if the center-right Liberal/Country Party coalition wins in September (as the opinion polls are forecasting), we can expect some tax cuts and maybe faster growth.

There's really only one problem in Australia. It's the balance of payments.

A paragon of good management like Australia naturally attracts hot money, and that has pushed the exchange rate up by about 6% in the last year. As a result, Australia is running a payments deficit of about 5% of GDP, financed by inflows of foreign capital into both Australian investments and the government bond and money markets.

How to Invest in Australia

However, Australia's great strength is its mineral resources, which have proven very attractive indeed as the Chinese economy has ramped up.

Australia is the world's largest exporter of coal, the third largest producer of iron ore, the second largest producer of gold after China, the largest producer of bauxite/aluminum and the second largest producer of nickel and zinc.

Only in energy does it lag. It's the third largest producer of natural gas, expanding rapidly, but nowhere near self-sufficient in oil. But even that is about to change in a dramatic way.

As Dr. Kent Moors has reported, a recent discovery in Australia's Arckaringa Basin could contain as much as 233 billion barrels (or $20 trillion worth) of recoverable shale oil.

To put that into perspective, that's a mere 30 billion barrels shy of the estimated reserves of Saudi Arabia. It is also bigger than the Athabasca oil sands in Canada, which are estimated to hold about 170 billion barrels of proven or probable reserves.

One final advantage: Australia ranks third, after Singapore and Hong Kong, on the Heritage Foundation's Index of Economic Freedom (the United States is only tenth.) That, too, makes it an attractive place to put your money.

The simplest way to invest in Australia is through the index ETF iShares MSCI Australia Index (NYSE:EWA). At $2.5 billion in assets, this is a good size and its expense ratio is only 0.53%. With an excellent 5.2% dividend yield of and a P/E of 15, EWA offers solid value, especially for income investors.

Alternatively, if you want to participate directly in Australia's mineral wealth you should consider Fortescue Metals (OTC:FSUGY). Fortescue buys and exploits iron ore properties, including the Cloudbreak, Christmas Creek and Solomon projects in Western Australia.

The world's fourth largest iron ore producer, Fortescue shipped its first ore in 2008. Up to June 2012 the company reported a profit of $1.56 billion, 42% of equity, and a 50% improvement on the prior year (debt is twice equity, but operating profit is 17% of total assets.)

While first-half profits to December 2012 were down 40% from last year at $478 million, the iron ore market has rebounded sharply since its low in September and the company's chairman sees much better demand from China in the second half. Its current P/E is a low 9.0 times earnings and, alas, being a young, fast-growing company it does not yet pay a dividend.

Given its immense mineral wealth and decent economic policy, what's not to like about Australia?

For my money, it's one of the best Western investments you can make.

[Editor's Note: If you'd like to learn more about the exciting new shale oil find in the Arckaringa Basin and the investment opportunities there, don't miss this powerful new interview with Dr. Kent Moors. Just click here to get all of the information.]

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About the Author


Martin Hutchinson has nearly 30 years’ experience as a global investment banker – plus a reputation for being bearish at just the right time. Slate magazine singled him out as the financier who most accurately predicted how bad the 2009 bear market would turn out to be. Martin is the editor of the Permanent Wealth Investor, where he focuses on stocks that pay high, reliable dividends. In his Merchant Banker Alert, Martin uncovers the fastest-growing companies in the fastest-growing economies and brings those ideas back home to you. Learn more about Martin on the Money Morning contributors page.


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