by Carl Delfeld, Contributing Editor, Investment U
Monday, December 13, 2010: Issue #1406
If you’re looking to kick your global investing up a notch, then look no further than Australia – a country that’s right in the sweet spot between growth and profits. Among its benefits…
- It’s commodity-rich.
- It boasts ample natural resources and beautiful weather.
- A 2010 United Nations survey ranks it as second only to Norway in terms of the best countries to live in, measuring factors like wealth, security, equality and happiness.
And over the past several years, the Aussies have managed to redefine their image from a laid-back paradise for golfers and beach bums into a premier global growth story. But how?
In a word: China.
And in a phrase: Asian emerging markets.
Let’s head Down Under and dig into the Aussie growth story…
How Australia Dodged the Global Financial Bullet
There weren’t many developed nations that managed to avoid the recent financial meltdown. But Australia was largely able to dodge the crisis, thanks to its strong trade relations with Asian and emerging market nations.
In fact, The Financial Times reports that Asia is the destination for 72% of Australia’s exports – up from 40% as recently as 2000.
And it’s no surprise to see that China is Australia’s largest export partner, accounting for $46.4 billion in trade in 2009. Its share of total Australian exports has quadrupled to 25%.
Other Asian nations Japan ($37.1 billion), South Korea ($16.5 billion) and India ($16.2 billion) take second, third and fourth spot, respectively. By contrast, Australia-United States trade totals just $9.5 billion annually.
To further strengthen its trade relations with Asia, Australia signed a Free Trade Agreement (FTA) with the 10-country Association of Southeast Asian Nations (ASEAN) and is also negotiating FTAs with China, Japan and Korea. In addition, Australia is conducting feasibility studies for such trade agreements with India.
And if you break down the reasons behind Australia’s successful trade, there’s a clear winner…
Liquefied Natural Gas Driving Australia’s Strong Performance
There’s no doubt that demand from Asia is behind the surge in Australia’s energy infrastructure.
Chevron Corp (NYSE: CVX), BG Group, Royal Dutch Shell (NYSE: RDS-A) and ConocoPhillips (NYSE: COP) are among the energy companies that are investing about $200 billion in proposed liquefied natural gas projects in Australia.
Western Australia is a big beneficiary. Unemployment in the region has dropped to 4.5%, thanks in part to what Chevron calls a “mega” liquefied natural gas initiative there. The company’s Wheatstone and Gorgon LNG projects are directly linked to the demand from massive Chinese expansion and Asia’s energy needs.
All told, Chevron will increase its capital spending by 20% in 2011 to $26 billion, with around $4.4 billion set aside for its Western Australian projects.
On the other side of the country, in Queensland, BG Group will begin building a $15 billion liquefied natural venture, which will generate 5,000 construction jobs.
This underscores a Bloomberg report last week, which showed that job creation in Australia jumped by the most in 10 months in November. That’s driven the country’s jobless rate down from 5.4% to 5.2%, even as more people entered the workforce.
In turn, that’s led the Australian stock market higher, as well as the Aussie dollar, which reached parity with the U.S. dollar just last month. And the Reserve Bank of Australia has responded by keeping the benchmark interest rate steady at 4.75%, citing the need to fight pending inflation.
But Australia isn’t just about commodities and energy. Far from it…
One of the Best Ways to Take Advantage of Australia’s Mojo
Economic ties between Australia and Asia have broadened from the resources sector to other areas.
And nowhere is that more apparent than in Australia’s large financial sector. It already comprises 40% of the country’s stock market and the iShares MSCI Australia Index (NYSE: EWA) allocates almost 45% of its assets to financial firms.
So don’t be fooled when you learn that the fund’s top individual holding is mining giant, BHP Billiton (NYSE: BHP). The rest of the top five consists of major banks, all of which just happen to have significant exposure to commodities and energy. So in short, the fund gives you the best of both worlds when it comes to capitalizing on Australia’s strengths.
Australia represents a strong investment in its own right. But it’s also a great, high-quality proxy for the Chinese and Asian economic wave. And as long as that wave remains strong, Australian companies will ride along with it.