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Australia: the six-star investment

In recent weeks at the Eureka Report weï¿½ve been highlighting some of the opportunities for investors in 2010 now that the big initial rally out of the bear market is over and the world is into the ï¿½grindï¿½ that always follows that first glorious uplift. Electric cars, the new IT revolution, gas, QBE, hybrids, term deposits, are some of the things weï¿½ve been drawing to your attention.

5 May 2010

Clouds might hang over the rest of the world, but there are only blue skies over the wide brown land...

In recent weeks at the Eureka Report we’ve been highlighting some of the opportunities for investors in 2010 now that the big initial rally out of the bear market is over and the world is into the “grindï¿½ that always follows that first glorious uplift. Electric cars, the new IT revolution, gas, QBE, hybrids, term deposits, are some of the things we’ve been drawing to your attention.

Today I have another opportunity for you, perhaps the best of all: AUSTRALIA.

No, no, not the Baz Luhrmann movie, the country. You know, the one you live in (probably). Godzone. The land down under … where women glow and men plunder. Can’t you hear, can’t you hear the thunder?

Think about it. Europe and the United States are facing the prospect of 10- year recessions because of intractable fiscal imbalances and a deep-seated macroeconomic malaise. Japan has the highest government debt in the world, but after its own two-decade depression it seems to be trying to recover (good luck with that!). The other emerging markets look fine, but you can’t safely invest in them directly – particularly the biggest and most rapidly emerging market of all, which is China.

Australia, on the other hand, is travelling beautifully. It’s exposed to the new growth engines of the world, like China and India, but also providing a hedge against a breakdown of the emerging market miracle because, unlike China, our economy is mostly based on domestic consumption and investment. We are in a virtuous cycle of low unemployment, high investment, improving fiscal balance, low inflation, and strong terms of trade.

I’m not saying things are perfect or entirely without risk, but Australia does seem to provide a unique combination of blue sky in the emerging world and insurance against the risks in the developed world.

In fact the key risk to the Australian economy was highlighted in a report recently about Victoria’s desalination plant. With high wages growth and inflation threatening business investment, Thiess is apparently agreeing to pay workers whatever it takes to get the project finished within its deadline. Reports suggest $200,000 salaries for carpenters, and $700 a week living away from

home allowances for all.

Backing up the energy-related non-residential business investment will be a residential construction boom, caused by the shortage of housing in this country, low rental vacancies and rising house prices. Housing starts surged 15% in the December quarter and there’s no reason to think this will stop soon.

And on top of that, consumer spending will be supported by low unemployment. This time last year the Treasury and the Reserve Bank were predicting that unemployment would peak at 8.5%; it turned out to be 5.8% and is now down to 5.3% and apparently heading for less than 5% again.

Australia’s economy is travelling beautifully and there is no reason to think this won’t continue.

So two questions arise: why has the sharemarket underperformed the rest of the world if the economy here is so strong, and what will it do in future?

The answer to the first is a combination of things. First, last year’s huge lot of capital raisings diluted existing shareholders and held down earnings per share.

As Rudi Filapek-Vandyck reported on March 3, it’s been estimated that the ASX 200 would now be at 5700, or about 20% above where it is now, if it hadn’t been for the share issues last year.

Second, the currency has absorbed whatever the extra shares on issue have not. In US dollar terms, the Australian market is up 125% since the low of last March – not 55%, which is the increase in local currency.

Third, the domestic-facing stocks have outperformed the world, while it’s Australia’s global stocks that have held the market back. The banks, for example, have doubled in the past 12 months; BHP, on the other hand, is up just 45%.

As for the future, the fundamentals are good. Sentiment and momentum are always hard to pick, and we are investing in a global marketplace in the marginal pricing is being controlled by speculators and institutional investors who tend to put Australia into the “riskï¿½ category, not “safe havenï¿½.

It means that when risk-aversion creeps back into the psyche of global investors, Australia gets dumped.

My message today is: when they do that, buy from them. If, or rather when, the Australian market goes backwards over the next few months as the weight of sovereign debt problems in Europe and America become too great, see it as a buying opportunity.

Start a One month free trial membership by visiting www.eurekareport.com.au/WI.This offer is open to persons new to Eureka Report.

Alan Kohler – Eureka Report

Alan Kohler is the founder and publisher of Eureka Report. Eureka Report is an online investing publication providing fundamental analysis and investing insight about shares, cash, portfolio strategy, property, funds and commodities to over 15,000 members.

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