Surf s Up Down Under
Below is a MRR and PLR article in category Finance -> subcategory Other.
Surf's Up Down Under
Australia: The Lucky Country's Economic Streak
Australia's economy is enjoying a record-breaking 14-year boom, raising the key question: Can this lucky streak continue?
Economic Transformation
From a humble start as a convict settlement in 1788, Australia has evolved into a robust global economy. This remarkable transformation began in the 1980s with key reforms by former Prime Minister Bob Hawke and Treasurer Paul Keating. They slashed import tariffs, floated the currency, and reduced the power of labor unions. Current Prime Minister John Howard has expanded on these reforms, steering Australia through 14 years of uninterrupted growth at 4% to 5% annually.
Strong Economic Indicators
Australia's national debt is nearly eliminated, and its currency remains strong. The country recently signed a free-trade agreement with the US and is negotiating with China. In 2004, Australia attracted $42 billion in foreign direct investment.
Investment Success
Our investment in the Australia iShare (AMEX: EWA) has performed exceptionally well, yielding a 105% gain over the past two years. It's up 15% this year, offering investors exposure to about 60% of Australia's stock market.
Emerging Challenges
While the economy appears strong, there are potential risks:
- A shortage of skilled workers and high labor costs.
- Complex labor rules affecting productivity growth.
- A 22% tax rate by the federal government, higher than most Asian countries and the US.
- Housing prices surged 100% from 2000 to 2004, with household debt at 160% of disposable income.
Addressing the Issues
Australia is taking steps to tackle these challenges. The government has initiated a $17 billion tax cut over three years and the central bank is raising interest rates. Radical labor reforms aim to increase employer flexibility and decentralize labor negotiations?"measures strongly opposed by the Labor Party and trade unions.
Economic Diversification
Despite reliance on China and commodities, Australia's economy is diverse, with mining contributing 5% of GDP, tourism another 5%, and services 80%. The country boasts the region's third-largest stock market and a leading financial center.
Portfolio Strategy
Given the situation, I recommend remaining invested in Australia but taking some profits by reducing our position:
- The decline in housing prices hasn't significantly impacted related sectors.
- International fund managers are underweight on Australia.
- The market valuation isn't high, with a forward P/E ratio of about 15.
- Australian stocks offer an average dividend yield of around 5%.
Prominent Companies
BHP Billiton (NYSE: BBL), the world's largest mining company, posted an 85% rise in net profit to $6.5 billion, setting a new corporate record. Another major player to watch is Rio Tinto (NYSE: RTP), offering a lower valuation due to the absence of oil and gas operations, contributing 30% less to revenue compared to BHP.
Final Thoughts
As the Asia-Pacific region gains economic prominence, Australia is strategically positioned. Keep an eye on housing prices and corporate profits, but maintaining some exposure to Australia in your global portfolio is wise.
For more details, visit www.chartwellasia.com or call 877-221-1496.
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