Vacationers know her beaches and coral reefs. Wine connoisseurs know her vintages. But few investors seem to know the advantages offered by Australia and its remarkably resilient economy.
Dollar-based total returns of Australian shares have consistently outperformed developed equity markets across the globe. Through November 13, MSCI reports the Australian market soared 95% in 2009. No other market did better. The same holds for the trailing three years, with Australian stocks averaging annualized returns of 7.49%. Five-year annualized returns of 14.04% were bested fractionally only by Spain. Over the last decade, Australian stocks again led the way, averaging total returns of 13.99%.
Despite the current strong rally, both the MSCI US and EAFE indexes pale miserably over the comparable period.
Domestic 1-, 3-, 5-, and 10-year annualized returns were 23.93%, -5.27%, 0.74%, and -0.64%, respectively. Foreign market returns weren't much better: 43.57%, -3.79%, 5.38%, and 2.84%.
As a source of secure income, Australian commonwealth sovereigns, AAA-rated government bonds, have traditionally yielded several percentage points more than U.S. Treasuries across the yield curve. As of mid-November, Australian yields were collectively averaging 5.43% versus U.S. yields of just 3.02%, according to the J.P. Morgan Overseas Government Bond Index. There is a huge spread in short-term yields. One-year Treasury notes were yielding a mere 36 basis points; Aussie Sovereigns due in eight months were yielding 4.25%. Venturing into AAA-rated state bonds gets you an additional 50 basis points, and AA-rated corporate bonds up to another 150 basis points.
Further supporting these opportunities is a currency that's been steadily appreciating against the dollar for a number of years. Since getting knocked back by the unexpected dollar rally at the end of 2008, the Aussie dollar has rallied 50% against the greenback over the past 12 months through November 13. For unhedged investments in Australian securities, that appreciation went straight to the bottom line.
"Australia's economy has been broadly protected from the economic storm raging in the rest of the world," reports the Economist Intelligence Unit. While jobs have been disappearing at an alarming rate across many developed markets, Australia's unemployment rate of 5.7% has increased by only 1.5 percentage points over the past year and has remained flat since June.
EIU reports that house prices in Australia have barely budged from historic peaks in 2007. With virtually no subprime exposure and loan arrears remaining small, the country's banking system has held up well, having remained profitable throughout the financial crisis, enabling lenders to stimulate growth.
"Most important," notes the EIU, "the country's trading position with Asia, and especially China, is flourishing. China, where growth is booming again, is now Australia's largest trading partner. Exports of raw materials have grown from 20% of Australia's exports to more than 40% in the past decade."
All of these factors have helped the economy avoid recession. It expanded 2.4% in 2008 and is projected to end 2009 having grown by 1.0%. That will mark the 17th consecutive year of GDP growth that's been averaging well north of three percent annually. "That defies statistical logic," observes Derek Izuel, manager of Highmark Capital's Core Equity fund, with more than a decade of experience managing global portfolios. He believes there hasn't been a reversion to more earthbound averages because Australia is an atypical market.
"The country is unique-a huge, mineral-rich, economically diverse land mass hosting a small population of just 22 million people that's complemented by well-capitalized banks," Izuel says. Four of the world's large AA-rated banks are Australian. Izuel says that the country "enjoys [a] strong corporate governance and regulatory environment that support an efficient, established marketplace."