Australia: An Investment Diamond in the Rough

by: Thomas Brigandi

Australia has been in the news recently due the country’s first hung parliament in roughly 70 years. The Australian political climate might be a bit volatile until a new government is formed; however the Australian economy seems to be doing reasonably well. In fact, Australia is one of the only developed nations experiencing economic growth.

Compared to the United States and the European Union, where bond yields are at historical lows and equity market volatility is quite high, the land down under is a relatively safe investment venue to put money to work.

Australia’s economic strength stems from its booming commodity exports to China and other emerging nations. According to the article “Australia bullish on iron ore and coal,” from the Financial Times:

Australia, the world’s largest exporter of commodities such as iron ore and coal, on Tuesday painted a fairly bullish picture for bulk raw materials consumption and prices in 2010-11, playing down fears about the impact of the eurozone debt crisis.

The projection bodes well for global miners such as BHP Billiton, Rio Tinto, and Xstrata, which make a significant share of their earnings in Australia, and for commodities trading houses such as Glencore and Hong Kong-based Noble. Abare, an official forecasting agency, said that the country’s raw materials export earnings would surge by 23 per cent to a record A$203bn in the year ending June 2011.

I believe the Australian economy will continue to grow as the emerging economies continue to industrialize and consume more Australian commodities. Australia’s strength during the global financial crisis suggests that it may be a leader in the future during both good times and bad.

As a result, I recommend being long two Australian blue chip stocks that should appreciate in stock price and dividend yield going forward. These two companies are the Australian mining giant, BHP Billiton, and the Australian financial services powerhouse, the Macquarie Group.

BHP Billiton Ltd. (NYSE:BHP) is the world's largest mining company. BHP has a wide range of operations ranging from Asian nations like Pakistan to South American countries such as Peru. The company currently has a market capitalization of roughly two hundred twenty billion dollars and a relatively attractive dividend yield of 2.37%. Moreover, BHP’s yield is well above the mining industry average of 0.69%.

Additionally, BHP’s recent all-cash takeover offer for the Canadian fertilizer company Potash points to the fact that this company is flush with cash and is looking to grow earnings through acquisitions. It seems that BHP’s strategy will be to use its vast coffers to expand into sectors which will yield high returns on greater demand going forward, such as the agricultural fertilizer industry.

Essentially, an investment in BHP Billiton is an investment in the belief that demand for commodities from the developing world will continue. If you are a believer in the global growth story of the emerging world, you should take a closer look at this company. As China (the newly minted second largest economy in the world), India, and other emerging nations continue to grow their industries, the price of iron ore and other hard commodities will continue to rise. BHP should see a significant benefit from this growth.

In addition to BHP Billiton, the Australian bank Macquarie Group (OTCPK:MQBKY) is also a good play as it finances a sizeable chunk of the developing world’s expansion. The Macquarie Group is a global financial services company which provides a wide array of banking services to retail, institutional, and corporate clients across 28 countries. The Sydney-based banking giant trades on the Australian Stock Exchange under the ticker MQG. Like BHP Billiton, Macquarie has a dividend yield well above its industry average. The company is currently yielding 4.84%, while the average yield for its competitors is 1.39%.

Macquarie is rapidly expanding to compete in the emerging centers of finance in the BRICs, Indonesia, the U.A.E., and South Africa. Additionally, its infrastructure unit, a leader in capital asset privatizations, is likely to continue to become more profitable as the state and local governments in developed nations lease and sell their roads, bridges, and parking meters to make up for budget shortfalls.

Although the Macquarie Infrastructure Group trades separately under the ticker MIC, it is another part of the expanding Macquarie brand which has its eyes fixed on becoming one of the largest banks in not only Australia, but also the developing world.

I recommend taking advantage of the corporate earnings and economic growth coming from the emerging world and avoiding the deflationary pressures which look to be hitting the developed markets currently. These Australian companies, BHP Billiton and Macquarie, both give exposure to the growth in industrializing nations without being fully exposed to the risks associated with investing directly in emerging and frontier markets.

Disclosure: No positions