Historically speaking, over the last century, Australia’s stock market has outperformed all others and has offered one of the lowest volatilities among all of its peers. As for the future, there are three forces that could enable the nation down under to continue to shine.
According to a study conducted by Credit Suisse, during the period of 1900 to 2009, Australia’s markets posted 7.5% after inflation returns per year while witnessing a standard deviation of 18.2%, the highest returns and the second lowest volatility of the 19 major, mostly-developed markets studied. In comparison, during the same time period, the U.S. stock market made a 6.2% return with a standard deviation of 20.4%. What this demonstrates is that investors would have made more money and taken less risk by investing in Australian markets.
One force that could enable Australia to remain prosperous is its close ties to Asia, states Howard Gold of Market Watch. Half of Australia’s exports go to Asia, with China being its largest trading partner. With economic growth prospects in Asia, in particularly China, remaining relatively healthy for the next 10 years, Australia is set to reap the benefits.
A second force that could add to Australia’s appeal is its sound and stable financial system. Australia has a handful of large banks which are known to be highly conservative and straightforward. In fact, Aussie banks are among the world’s best performers and were hardly influenced by the global financial crisis. Additionally, Australia’s central bank has raised interest rates six times over the last year enabling the nation to witness an expected budget deficit of a hair over 4.2% of GDP. Last, public debt in the continent remains healthy at less than 18% of GDP.
The last force that makes Australia appealing is its vast supply of natural resources. The country has tons of coal, iron ore, uranium, zinc and gold. In fact, it is home to mining giants Rio Tinto (RTP) and BHP Billiton (NYSE:BHP). Additionally, Australia produces oil and natural gas as well as wheat and other agricultural products. As economies around the world grow and the global population continues to increase these resources are likely to see increased demand.
Some ways to gain access to Australia include:
- iShares MSCI Australia Index Fund (NYSEARCA:EWA), which has 74 holdings with the following sector breakdowns: 44.35% to financials, 26.4% to materials, 10.19% to consumer staples and 6.67% to energy.
- WisdomTree Pacific ex-Japan High Yielding Equity Fund (DNH), which allocates 90.5% of its assets to Australia.
- WisdomTree Pacific ex-Japan Total Div Report (DND), which allocates 59.2% of its assets to Australia.
- PowerShares FTSE RAFI Asia Pacific ex-Jp Portfolio ETF (NYSEARCA:PAF), which allocates 41.2% of its assets to Australia. Its top holdings include BHP Billiton and Rio Tinto.
Although an opportunity seems to exist in Australia, it is equally important to keep mind the inherent risks that are involved with investing in equities. To help mitigate these risks having an exit strategy is a good idea.
Disclosure: No Positions