Australia’s abundant natural resources, coupled with its proximity to China and Asia’s other emerging markets, give the commonwealth a competitive edge and fueled a boom in the nation’s mining industry that lasted the better part of a decade. While much of the developed world suffered through a gut-wrenching economic downturn between 2008 and 2009, Australia’s economy didn’t slip into recession.
However, these tailwinds have dissipated in recent quarters: China’s economic growth has slowed to an annualized rate of about 7 percent, and Australia’s mining industry faces a significant overcapacity in the near term. Battered by weak demand and excess supply, the prices of all manner of commodities–from copper to iron ore–have dropped precipitously. In this hard-hit industry, cost-cutting, debt reduction and project delays and cancellations have become the norm. (We explored these challenges and highlighted the opportunities for patient investors in Digging for Deep Value in the Global Mining Complex).
Natural resources account for about 70 percent of Australia’s overall exports, compared to 50 percent a decade ago; the contraction in the mining sector has rippled throughout the economy. The Reserve Bank of Australia has moved aggressively to offset this challenge, cutting interest rates eight times since late 2011 in an effort to stimulate activity in manufacturing, housing and other segments of the economy. These efforts haven’t stopped unemployment from heading higher and the rate of economic growth from slipping to an annualized rate of 2.6 percent from 4 percent in the second quarter of 2012.
But the Australian Stock Exchange is home to a number of high-quality dividend payers that trade at favorable valuations. Over the long term, Australia’s massive investments in developing its resource base put the country in pole position to serve as emerging-market Asia’s preferred provider of raw materials. Patient investors should take a closer look at this undervalued market.
Several recent developments could also drive near-term upside in Australian equities.
Disenchantment with the economy contributed to the governing Labour Party’s loss to Tony Abbott’s Liberal-National coalition in the Sept. 7 election. Abbott has long pledged to cut corporate levies and eliminate the Labour Party’s controversial taxes on carbon emissions and the mining industry. If the Liberal-National coalition is able to make good on these promises, corporate profits would benefit in a wide range of industries.
The 16 percent decline in the US dollar-denominated exchange value of the Australian dollar over the past 12 months should also help to boost the economy.
In recent years, the currency’s steady appreciation had fueled significant increases in wages and other operating expenses; the Australian dollar’s retrenchment not only provides corporations with some cost relief, but it also makes the commonwealth’s exports more price competitive.
In short, the time is right for US-based investors to consider diversifying their country and currency risk by buying our favorite Australian equities.
Considerations for US Investors
The Australian Stock Exchange is uncharted territory for many US-based investors, in part because of their lack of familiarity with the market and the obstacles associated with investing internationally.
Some brokers balk at executing international trades or charge exorbitant fees for these transactions; investors who encounter these challenges should consider EverBank, Interactive Brokers or one of the other low-cost brokers that has extensive experience in foreign markets. Don’t let a recalcitrant broker prevent you from investing in the best of what the world has to offer.