The closest thing to a panacea for today's market uncertainties may be Down Under. In virtually every respect, Australia offers investors the best of all worlds.
It's true even for very safe short-term yields (which are currently microscopic in the U.S.) In mid-June, one-year AAA-rated Australian government treasury bonds yielded 4.45%, 416 basis points more than U.S. Treasurys with similar maturities.
This huge spread is not caused by some Greek drama unfolding in Australia. On the contrary, Australia has perhaps the healthiest developed market economy. The country is resource rich and has one of the highest-ranked business environments anywhere. Unemployment is relatively low, consumers are spending, and so is China-Australia's top importer.
The country has enjoyed more than 17 uninterrupted years of economic growth where expansion has averaged more than 3% a year. And the economy sidestepped the banking and housing crisis the rest of the world's major markets were mired in during 2008 and 2009. According to the Economist Intelligence Unit, the country's housing prices have held close to the historic peaks they hit in 2007. And with virtually no subprime exposure and manageable loan arrears, Australia's banks have not only remained profitable throughout the global banking crisis, but unlike U.S. banks, they continue to lend-and that supports growth.
So impressive has been the country's economic resilience that the Reserve Bank of Australia was the first major central bank to start bumping up overnight rates. It has done so six times since last fall-25 basis points at a clip-sending official rates up to 4.50%. This is a testament to the central bank's long-term commitment to keep a lid on inflation. For decades, interest rates have been generally higher there than in the rest of the developed world. So investors shouldn't blink at these sweet yields.
Chuck Butler, president of St. Louis-based Everbank World Markets, thinks the Australian overnight rates will head up to 5% by year's end. That means investors looking to park money in Sydney might want to stay with short-term maturities to avoid the sinking price that would accompany rising rates.
Everbank offers retail investors access to sovereigns and foreign CDs at a $20,000 minimum. Foreign-exchange conversion fees, necessary to buy and sell Australian dollar-denominated securities, are 75 basis points above Interbank Rates-these are the best exchange rates, quoted in the newspapers, only available to prime customers.
Everbank charges 50 basis point commissions on sovereign purchases. That takes a sizable chunk out of a short-term income play. But there are no commissions when bonds mature back into cash.
This means that after all expenses, investors can still expect to pocket about a 4% yield on one-year Australian sovereigns. An additional 20 to 30 basis points can be had by venturing into highly rated state bonds-such as those of New South Wales and Queensland, which trade with adequate liquidity. And investors can secure an additional 150 basis points when buying into some of the country's "AA" bank bonds, such as those of Australia & New Zealand Banking Group and Westpac Bank.
Another compelling source of yield is stocks. The Financial Times reports that Australia has the highest dividend-paying equities among the developed markets with a current average yield of 4%. The only developed economies paying more are those in the eye of the European sovereign debt crisis: Portugal, Spain, Italy and Greece.
But Australian stocks are more than just income plays. Global market data tracker MSCI reports that Australia is among the top-performing developed markets in U.S. dollar terms. One-year total equity returns through the end of May 2010 surged 26.7%-topping the U.S. market by 5.7 percentage points and the international developed-market benchmark, EAFE, by nearly 20 percentage points.
Australian stocks lost 5.64% annually over the past three years, which includes a period when investors dumped equities and sold off foreign currencies. But that was still 289 bps per year better than the U.S. performance and 700 basis points per year better than the EAFE. Only Canada performed better-off only 1.76% a year.