Over the past five years, again only Canada outpaced Australia, 11.4% versus 8.97%. But Sydney shares outperformed the U.S. by 850 bps per year and the EAFE by 710 basis points per year.
Over ten years, however, no developed market has done better than Australia, which soared 12.56% annually, outpacing Canada by 430 bps a year, the U.S. by 1,350 basis points per year and the EAFE by 1,149 basis points per year.
Australian shares have soared not only because of the country's sound economics, but because a number of companies that trade in Sydney are global industry leaders.
Macquarie Group (its over-the-counter symbol is MQBKY) is among the most innovative investment banks in the world, excelling in infrastructure financing. Its shares have gone up by a third over the past year. Macquarie's business model is buying various hard assets, such as airports, highways or real estate, and assembling them into funds. Macquarie sold off some of these funds, which contributed to a 20% increase in net profit to more than A$1 billion (an increase in line with its five-year earnings growth rate) for its recently closed fiscal year of 2010. A trailing PE of less than 14 coupled with the bank's 4.4% dividend makes Macquarie a compelling play.
Australia's Woolworths Ltd. (which trades as WOW on the Australian Securities Exchange and is not to be confused with the former U.S. retailer), has enjoyed a decade-long annual earnings growth rate of 18.6%. This has supported the company's steady stock and dividend expansion. Morningstar analyst Peter Warnes describes Woolworths as "a defensive growth stock with a solid balance sheet and imposing [competitive] moat" that separates it from the rest of the sector. The share price has held remarkably steady, even during the worst of the recent crisis, and a 3.9% yield has enabled the trailing total return over the past year to exceed 11.5% (in local currency terms.)
As generators of substantial cash flow, incumbent telecom service providers have become today's top yield plays. Few are spinning off as much cash as Telstra (traded over the counter as TLSYY), whose current dividend is close to 9%. However, that also currently represents most of its earnings.
Telstra is certainly vulnerable to competition, but it remains the country's leading telecommunications and information service provider. And it recently signed a nonbinding agreement to share its infrastructure with the National Broadband Network. This clears up nagging regulatory issues and is expected to generate A$9 billion (measured in present value terms) for Telstra from competitors using its network.
Its shares have been volatile of late, and the earnings growth rate has been trending in the low single digits. Still, the stock managed to gain more than 12% over the past year.
A significant part of the Australian economy is driven by commodities, and the biggest industry player anywhere is Melbourne-based BHP Billiton (BHP). According to Morningstar analyst Mark Taylor, a key to the company's success is its low-cost operations and strong balance sheet. "This is a foundation resource investment for conservative portfolios," says Taylor. And with the threat of a super profits tax on domestic miners diminishing with the recent change in government leadership, pressures on BHP's shares may come off.
If one believes in the current global recovery thesis, BHP should benefit. But commodities, volatile by nature, are a leveraged play on growth, and BHP faces the risk that forward expansion could be uneven.