When investors think of Australia, it usually has to do with commodities and mining companies such as BHP Billition (BHP). However, the Aussies have a vibrant economy outside of hard assets. Spurred by trade with Asia, a rapidly appreciating currency, and a low amount of government debt, Australia has become the fastest growing economy among developed nations. Mining tends to dominate the Australian economy, but there are plenty of companies in other sectors that will continue to benefit from growth in the Asia-Pacfic region. In this article, I have listed some of the leading investment opportunities outside of the basic materials sector that can be found "down under."
Telestra (TLSYY.PK) - Telestra is Australia's leading telecom company. Since the landline and mobile phone market is pretty saturated, there is not much room for capital gains growth in this stock. However, the company pays an excellent dividend with a 9% yield, has an ROIC of 12%, and is still highly profitable with a 13% profit margin. However, declining earnings growth rates and a high long term debt/equity ratio are concerning.
Village Road Show (VLRDF.PK) - Village Roadshow is an Australian media company that produces and distributes films, owns local cinema chains, and runs seven amusement parks in Australia and the US. It currently has a co-production agreement with Warner Bros. which has led to a long list major films. Financially the company is trading at a value. VRL has a P/E of only six, a 28% earnings growth rate over the past five years, a 1.95% dividend yield, and PEG ratio under 1. Like Telestra however, its leverage levels are extremely high (1.45 debt/equity ratio).
Since there are not that many ADR's available for Australian companies (most of them are in basic materials), another way to capture the growth of the Australian economy as a whole is through these ETFs. They do hold significant shares of their portfolios in the mining sector, but nevertheless do a good job reflecting the economy as a whole. IAF is better for income oriented investors while the KROO is better for capital gains growth.
Australian Small Caps ETF (KROO)- The KROO is the best Australian ETFs for growth oriented investors. It tracks the IQ Australia small cap index, and is a good measure of how smaller companies are performing in the country. One third of its portfolio is basic materials stocks. The next biggest sectors are consumer cyclicals (22.46%) and industrials (16.57%). With the a housing bubble due to pop in Australia, it's fortunate that the KROO has no exposure to real estate.
Aberdeen Australian Fund (IAF)- This Aberdeen fund is a close ended whose composition reflects the broad growth of Australia. 72% percent of the fund's assets are outside of the basic materials sector with financials (30.8%) and consumer goods (15.8%) being the heaviest weighted sectors. There is room for significant capital growth, yet it pays a very strong dividend with a yield of 9.74%. It is currently trading over its net asset value, so I would wait until it falls to a technical support level (which is also below its NAV) at $11.00 per share before buying.
Overall, despite the floods causing a negative Q1 GDP, I still think Australia is a good country for long term investment. If you like mining stocks, go with BHP Billiton, but for any other sector I would recommend buying either the KROO or the IAF depending on your risk capacity. Most of the quality Australian stocks are not available via ADRs or are only pink sheets so these ETFs are your best bet.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.