Another compelling aspect of the country is its competitive standing globally. In its latest review of the quality of the business environment, the EIU ranked Australia seventh, six notches ahead of the U.S.
Reflective of the government's growing confidence that the economy has weathered the storm, the country's central bank, the Reserve Bank of Australia, has been raising interest rates. After having eased monetary policy from 7.25% in March 2008 to 3% in April 2009, the RBA was the first developed market central bank to start pushing rates up: 25 basis points in October and again in November.
Despite all of the country's positives, most globally diversified investors have only limited exposure to Australia. Advisors who have purchased the international index, EAFE, have provided clients with only 8.23% exposure to Australia. When relying on the MSCI All World Country Index, exposure falls to 3.31%.
Stocks
The Australian stock exchange is dominated by three sectors: Finance represents 27.5%, materials 22.9%, and consumer staples 14.2%. Within these groups, Australia has a number of industry leaders, many of which trade in the U.S.
BHP Billiton is the world's largest and most diversified resource company. It produces petroleum, aluminum, copper, gold, iron ore, coal, nickel and diamonds. Its earnings and stock price have been growing at a nearly 30% and 26% annual clip, respectively, over the past five years. The current PE is 18. According to Morningstar analyst Mark Taylor, keys to BHP's success are its low-cost operations, a strong balance sheet and operations that are based in the relatively safe havens of Australia, New Zealand, North America and Europe. He believes the company is an ideal way to play the economic recovery and the accompanying rise in commodity prices.
Macquarie Group is one of the world's most innovative investment banks. With a focus on infrastructure, the bank specializes in buying assets around the world and setting up specialized funds that eventually hold them. While shares got slammed by the banking crisis, they've rebounded close to their 52-week high. The reason, explains Morningstar analyst Peter Warnes, is that the bank has been free of unusual provisions or write-downs. It hasn't been exposed to problem trading or poor credits. Macquarie's "risk policies are closely aligned with those of Goldman Sachs, which has provided added confidence in its management and risk policies," he says.
Macquarie's average earnings growth rate over the past five years has been running north of 22%, with annualized price returns of more than 10%, and a current PE of 16.5. Investors enjoy a 4.7% dividend.
Australia also has strong commercial banks: Australia & New Zealand, Commonwealth Bank of Australia and Westpac. They have generated annualized net income growth near or into the double digits over the past five years and pay dividends exceeding 4%. Their stock prices have all appreciated from 8% to more than 11% annually over the last five years. Rich dividends have pushed these returns even higher. After investors dumped shares indiscriminately during the height of the banking crisis, these shares have all rebounded near their 52-week highs.
Woolworths Limited is known as "Wal-Mart Down Under," and it might be even better than the U.S. retail giant. Its shares barely budged during the crisis. Annual earnings, dividend and stock price growth has averaged more than 16% over the past five years as the company continues to thrive. Warnes describes Woolworths as a "growth stock with significant defensive qualities, possessing a strong balance sheet and a wide competitive moat characterized by extensive supply chain operations and intimidating buying power." And it offers a 3.8% dividend to boot.
Healthy dividends are a trait of Australian stocks, which is why they are the second-largest holding in the ING International High Dividend Equity Income Fund. The country represents 12.5% of manager Martin Jansen's portfolio. But he is keen on Aussie shares not just because of high, sustainable payout ratios, which are around 15 percentage points above U.S. standards. "Substantial distribution of profits to investors demands a greater discipline in the use of remaining capital and certainty about rates of returns on new investments, which has been confirmed by academic research that reveals that these stocks tend to have lower betas and volatility over the long run," Jansen says.