Investors should go down under for an economic success story
THE EYES of the sports world were expected to focus on Australia tomorrow for the inaugural match of the International Cricket Council 2020 World Cup. The country was to host the event in eight cities but Covid- 19 has forced its postponement to 2022.
Investors though are still attuned to the opportunities 9,420 miles away. Until the pandemic, Australia secured a global record of 29 consecutive years of economic growth. This has been achieved through periods of drought, flood, the dotcom crash and 2008 financial crisis.
Under Bob Hawke, Paul Keating and John Howard, subsidies were removed, tariffs reduced from 90 to five per cent, quotas cancelled and migration raised.
A more flexible workplace was established with denationalisation, deregulation of the financial markets and flotation of the Australian dollar.
Free trade deals were established with China, Japan, Singapore and the US. The increased exports to China have been particularly significant over the past two decades and now contribute over seven per cent to GDP and almost 49 per cent of its exports. Australia is one of the few developed countries to run a trade surplus with China.
Initially, the trade was in resources but services – notably education and tourism – are now more significant. Services now account for 62.7 per cent of the Australian economy and employ almost 79 per cent of the workforce.
The collapse of the technology bubble in the late 1990s and early 2000 left Australia relatively unscathed as there were no large companies in the sector.
The country is rich in natural resources such as aluminium, coal, gas, gold, iron ore, uranium and zinc. Copper is a solid area and essential for electrification.
With its geographic location, further away from other major economies and a population of only 25 million, Australia has not attracted major international competition.
Banking, insurance, telecoms and supermarkets are each dominated by three or four domestic companies.
Commercial property is also a key area, says Darius McDermott of Chelsea Financial Services. He notes that there has been less movement to online retail: “Even the likes of Amazon have struggled to build a presence and people like the social side of the malls.”
Waypoint is one of the country’s largest listed property companies. The manager of Aberdeen Asian Income Fund, Yoojeong Oh, includes it as part of 17 per cent in Australia because of the good rental income generated by petrol service stations and convenience stores even during the domestic lockdown.
Waypoint has actually increased its dividends.
Oh also likes other defensive stocks, such as Ausnet Services and APA Group, for stable revenues from transmission assets.
In the short term, Covid- 19 is not the only challenge. Record levels of household debt and a shift in China from investment to consumption are exerting pressure.
“Nevertheless, there remain good reasons to invest in Australia and we focus investments there on companies with a global outlook,” says Xiaoyu Liu, manager of Aviva Investors Asia Income Fund, which holds 14.3 per cent in the country.
Other Asian funds also have significant Australian exposure such as 17.5 per cent for Schroder Asian Income, 14.3 per cent with Jupiter Asian Income and 10 per cent in Guinness Asian Equity Income.
Emma Wall, head of investment analysis at Hargreaves Lansdown, says: “Australia offers some world class companies with strong outlooks but it can be sensitive to certain macro trends, such as commodity prices.”
Her recommended option is a diversified fund with an Asia Pacific remit “where the manager can select only the cream of the crop for your portfolio”.
Pure Australian investment funds are a rarity in the
UK. Instead Ben Staniforth, research analyst at Leeds- based Redmayne Bentley, suggests Baillie Gifford Developed Asia Pacific fund with 15 per cent in Australia. It has gained 112 per cent growth in five years.
Aberdeen New Dawn has 10 per cent invested in Australia with such key holdings as Cochlear for hearing devices and
CSL, a speciality biotechnology firm based in Melbourne. It has also invested in Aristocrat Leisure, a gambling machine manufacturer with over 6,400 staff, which was listed in 1996.
Domestically- focused companies could have their returns threatened by a change in regulations or competition whilst a technology landscape may lower the barrier for foreign entrants and digital disruptors.
Instead, investors may prefer the safely of Australian- based companies with global growth potential.
Liu suggests Sonic Healthcare, a leader in medical services of pathology, radiology and diagnostic imaging, with businesses in the US, Germany and other EU markets. Macquarie is preferred to domestic banks and BHP and Rio Tinto for commodities.
Jason Hollands, of Tilney Investment Management, says that the Australian stock market is not a replica of the Australian economy: 31 per cent of the exchange is accounted for by financial services with major players like the Commonwealth Bank of Australia, ANZ,
Macquarie, National Australia Bank and Westpac.
The market’s other major sectors are basic materials ( 20 per cent), such as mining group BHP, and healthcare ( 12.9 per cent). This contrasts with a vision from the UK which may be shaped by tourism, farming and vineyards.
Jonathan Jackson, of investment manager Patronus Partners, believes “such assets will be very valuable in the future. Real yields and returns on large swathes of the investment universe are going to be negative for the foreseeable future. Client portfolios should have an allocation to commodities to achieve a better long- term outcome”.
McDermott issues a warning that “the country is walking a fine line at the moment. Like Japan, it is keen to maintain regional alliances in Asia but is also keen to stay on the good side of Europe and the US”.
To cut commission costs, look wherever possible for companies with a dual listing in London and Sydney.
It is also possible to find a UKlisted company with significant
activities in Australia. Russ Mould, investor director at discount broker AJ Bell, cites two to consider: Anglo American with substantial metallurgical coal trade and Shell with major operations, notably in liquid natural gas.
Another route would be to take a passive investing approach through a tracker fund.
Several have been created including the top 200 companies by asset value to a regional, like the MSCI Pacific ex- Japan Index which will give 58 per cent exposure to Australian stocks.
Exchange traded funds, a form of tracker, have shown the best performance with 10.6 per cent annual growth over five years with Xtrackers S& P/ ASX 200 and 10.1 per cent for iShares MSCI Australia.
Looking forward, Australia has announced a major expansionary budget with the emphasis on safeguarding and even expanding the workforce.
Clearly, Antipodean links should not be just over cricket and wine but in finance with Australia gaining a rightful place in the portfolio.