Profits from Down Under

02/11/2005 12:00 am EST

Focus:

Nicole Pedersen-McKinnon

Editor, The Australian Financial Review Investor Section

"No doubt you’ve heard of Mel Gibson, Nicole Kidman, and Russell Crowe," says Nicole Pedersen-McKinnon. "But you’ve probably heard very little about the other big Australian starour stock market. That’s all about to change." Also in this article, we include some suggestions Mark Skousen had on how to invest "down under."

"Unbeknownst to many, Australia is not only the gateway to the world’s fastest-growing region, the Asia Pacific, it is also one of the most resilient economies in the world. Australia is the sixth-largest country in the world in land area, and it’s the only nation to govern an entire continent. It has a stable economic, political, and social environment. The population has just reached 20 million or 7% of the population of the US. Overall, Australia ranks among the world’s 20 largest economies and is the fourth-largest economy in the Asia Pacific

"According to the International Institute for Management Development (IMD), Australia is the #1 most resilient economy in the world. To arrive at its rankings, the IMD analyzes data from 60 countries and regional economies, using 323 criteria. Incidentally, in terms of competitiveness, while the US is number one in the world, Australia has moved from 12th to 10th to 7th to 4th in the last four years. So you’ve been warned, we’re after your crown!

"Australia's average growth over the last seven years places it fourth behind China, India, and Korea. Because of our strong growth, official interest rates are comparatively high in Australia5.25%. But this is a historic low for usin fact, it’s almost the lowest it’s been in 40 years. Inflation is also low, at 2.3% and unemployment is 5.1% and falling the lowest in 28 years.

"The Australian stock exchange is the ninth-largest in the world. But is it profitable? It certainly is! In fact, investment returns in the US, the UK, and Japan have more or less mirrored each other over the last five years, while Australia has streaked ahead. $10,000 invested in our stock market at the beginning of 2000 would have risen to more than $15,500. The All Ordinaries Index, rose 22.6% in 2004 vs. the US S&P 500 of 9.2%. And if you include dividends in the results for last year, the Australian stock exchange returned 27.9%.

"And while we're unlikely to see a repeat of last year’s returns, there are no signs of a market top, such as overvaluation, deteriorating market breadth, or investor euphoria. On the contrary, investors are nervous as cyclical commodities, which have led the market gains, are now trading on low p/e ratios because people are concerned we’re at the peak of the cycle. From a psychological perspective, this is a good sign. If no one was worried, it would be a strong indication that the market had actually peaked. Overall, the market is trading on a forward p/e of 14.9, which is comfortably below the ten-year average of 15.6 times. So I hope you can see that  our Hollywood stars aren’t all that’s on the rise in Australia."

Skousen, MarkSeparately from this speech, I would note that leading economist and US financial advisor Mark Skousen, editor of Forecasts & Strategies, is also a fan of Australia, and offers some easy ways for US investors to participate. Says Mark, "One of the hottest investment areas is Australia, and the best way to invest is by purchasing iShares MSCI Australia Index (EWA ASE), down slightly from last month. Exchange-traded funds such as EWA offer a convenient low-cost way to trade a wide variety of stock and commodity indexes. EWA tracks the popular MSCI Australia Index. It pays a 2.6% dividend and has a low 0.79% annual expense ratio. US investors can buy EWA through any broker. Our price target for 2005 is $25 a share. We are also invested in the region through the Aberdeen Asia Pacific Income Fund (FAX NYSE), a closed-end, non-diversified management investment company that invests in Australian and Asian debt securities. The fund currently yields 6.46% and is selling at a slight 2.8% discount to net asset value."

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