How to Profit From Australia, The Worlds Luckiest Country

By: Money_Morning

Martin Hutchinson writes: When the late Donald Horne called Australia the " Lucky Country" in 1964, the professor and well-known social critic meant it as an insult: He believed that while other countries were getting rich by developing special skills and embracing new technology, Australia prospered just because it happened to sit on a pile of valuable natural resources.

Well, in the global world of 2010, skill and technology are " two-a-penny" ubiquitous in an emerging-markets world in which billions of industrious people are competing against one another. In this new reality in today's world, natural resources are the key to global wealth.

And Australia is a prime beneficiary of that new reality.

To be sure, the Horne caricature was always unfair: The Australian economy after two generations of union-dominated lethargy became highly competitive again by the 1990s, a decade before global commodity prices began to soar.

But it was the subsequent rise in those global commodity prices (which started just after 2005) as well as the insatiable demand for raw materials from China and India that combined to fundamentally change Australia's competitive position. Once a listless manufacturing economy with a few mines attached, Australia has since developed into a commodities powerhouse, and is now the principal source of raw materials for the immense Chinese industrial engine.

The change in the global commodities balance from Chinese demand cannot be overstated.

While China's gross domestic product (GDP) is still less than a third of its U.S. counterpart, the Asian giant's demand growth is heavily concentrated in physical goods of large size including automobiles and domestic appliances, for example. Last year, China's automobile market leapfrogged the U.S. market to take over the No. 1 spot in the world for the first time ever. And it's growing at better than a 20% annual clip.

Global commodity supply simply cannot keep up.

That's a scary prospect for much of the world. But that's very good news for Australia, the closest and most convenient source of large-scale commodities that China needs particularly iron ore for its rapidly expanding steel industry, and coal for its power stations.

Since both commodities prices and demand are rising rapidly, there is a "double-whammy" effect on the Australian economy.

You can see this in Australia's macroeconomic statistics. The Reserve Bank of Australia has raised short-term interest rates five times in the last seven months, taking rates from 3% to 4.25%.

However, there is no current danger of inflation. Prices rose at a 2.1% pace in 2009 and the strength of the Australian dollar up 22% on a trade-weighted basis in the last year ensures that manufactured imports are getting cheaper and cheaper in Australian-dollar terms. The bottom line: Domestic prices are well under control.

The Reserve Bank's main fear is an asset bubble: With home prices up 13% in the last year on an already-inflated market, and the stock market up 60% since its lows of last March, Australian consumers are spending like there's no tomorrow, a propensity they share with their cousins in the United States.

The situation is made more dangerous by the Australian budget deficit. At 4.7% of Australian GDP for the fiscal year that ends in June, that's modest compared to the U.S. deficit, but it still represents an addition to the problem rather than a solution.

With money pouring in from foreign investors, consumers not saving adequately and the state also spending more than it takes in, the Australian economy is in a dangerous position. Monetary tightening through increased interest rates will not be enough: To reduce the excess demand in the system, Australia's government should also eliminate the budget deficit as quickly as possible.

Even with these caveats, however, Australia's stock market is a "Buy." Investors really can't afford to avoid it, especially as it continues to increase its importance to the overall global economy. Given the country's growth rate, Australian stocks are even reasonably valued, according to an analysis conducted by The Financial Times.

One way to benefit from this growth is via the iShares Trust Australia Exchange-Traded Fund (NYSE: EWA), which is currently trading at 15.5 times earnings with a yield of 2.7%.

Another alternative is to buy Australian mining companies directly, although few of them have ventured beyond the so-called " Pink Sheets" here in the U.S. market. One smaller gold-mining company (with a market capitalization of around $300 million) that looks attractive is Dominion Mining Ltd. [In the U.S. (OTC ADR: DMNOY)/In Australia (ASX: DOM)].

Dominion is involved in the Challenger Gold Mine in South Australia, together with two exploration projects one each in Western Australia and South Australia. Gold sales were 38,643 ounces in the six months to December; they are expected to ramp up to 120,000 ounces per year in this year. Dominion's shares are trading at a Price/Earnings ratio of 13, and feature a healthy dividend yield of 3.8%.

At the blue-chip end, there is BHP Billiton Ltd. (NYSE ADR: BHP), a huge beneficiary from the doubling of iron ore prices. The problem here is that BHP has a market capitalization of more than $200 billion, while its shares trade at a P/E north of 90. In short, BHP can hardly be described as "underpriced."

The bottom line: For those not willing to venture into the wilds of the Australian Stock Exchange, the iShares Trust Australia ETF looks to be the best bet.

Source : http://moneymorning.com/2010/04/20/australia/

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