Three Ways to Play Australia's Booming Economy
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Good news this week from the land down under, as the Australian Bureau of Statistics reported that first quarter GDP grew at 4.3% annually, the fastest in four years. Widespread gloom about Australia's economic prospects had led the Reserve Bank to cut interest rates, but this week's report indicates that Australia is more resilient than the pessimists had thought.
Australia's strong performance is nothing new: growth averaged over 3% annually for the last decade, an excellent performance for a wealthy, advanced economy. The major driver behind Australia's success has been the exploitation of vast mineral reserves in the west of the country. Strong demand for raw materials from China and other emerging nations has brought in great wealth for the country and fueled economic development throughout all sectors of the economy.
This week's statistics demonstrate the continued strength of the Australian boom, but it can be difficult for American investors to get a piece of the action. Many great companies are only listed on Australia's domestic exchange, the ASX, which some brokers don't trade on. If you don't want to switch brokers and you're not comfortable participating in Pink Sheets transactions, it's easy to feel locked out of the Australian market. Even mutual funds have this problem – for example, funds based on the MSCI Australia Index have nearly half of their assets in only five holdings. For those looking to invest in individual companies, it can be an even greater challenge to find a way in.
I've put together some strategies for investors to take advantage of Australian growth through companies that report to the SEC and are listed on American exchanges, either directly or through American Depositary Receipts (ADRs). I'll be exploring these options in greater detail, but for now here's an overview.
A discussion of Australia's economic rise has to start with the country's two largest miners, BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RIO). Both are top-tier competitors in the space, and both have been very successful in consistently acquiring and developing assets throughout the commodity cycle. Of the two, BHP is more diversified, with significant operations in coal, oil, and gas as well as metals. The majority of Rio Tinto's revenue typically comes from iron and copper, with iron alone contributing 80% of earnings in 2011.
While these two are headquartered in Melbourne, both also have global operations, lessening their dependence on Australia. However, a large number of regional miners operate in Western Australia alone. Many of these are listed exclusively on the ASX. A few can be found on American exchanges, but it's also possible to play the miners by investing in the infrastructure they rely on.
Two of my favorite Australian infrastructure providers are not Australian companies at all. Brookfield Infrastructure Partners (NYSE: BIP) has a global portfolio of high-performing assets, with a significant presence in Australia. In 2011 they expanded their freight rail network to become the largest rail system in mineral-rich southwestern Australia. Brookfield also counts one of the world's largest coal export terminals among their Australian properties. With these assets, Brookfield is excellently positioned to capitalize on Australian freight volumes, expected to double in five years.
Genesee & Wyoming (NYSE: GWR) has diversified away from its American shortline freight business by aggressively acquiring Australian railroads. Australian operations contributed 33% of total revenue in 2011, nearly double 2009 figures. G&W's rail corridor serves many productive mining sites in Western Australia, as well as several projects in early stages of development that could drive future growth. With a record of excellence in guiding new acquisitions to profitability, I expect G&W to continue growing its Australian footprint.
Thanks in part to its mineral wealth, Australia's consumers are rich and getting richer. Consumer spending growth has outpaced that of the moribund economies in Europe and the US. Unfortunately for international investors, retail is one of the most difficult sectors in Australia to access.
Luckily, Australia's four major banks have a near oligopoly on consumer credit, and my favorite of the four is listed in the US. I prefer Westpac (NYSE: WBK) to its peers because of Westpac's focus on retail banking, operating a portfolio of strong brands with high visibility for consumers. Despite justified concerns over an overheating Australian housing market, Westpac is conservatively managed and has enforced strict lending discipline since suffering catastrophic losses in 1992. Westpac shies away from riskier investments, concentrating on building their retail and business franchises and keeping margins high.
I'll be covering each of these companies in more detail in later posts, but all of them stand to benefit from a thriving Australia. This week's economic data suggest growth that is resilient, sustainable, and increasingly diversified. That's great news for Australians, and it can be great for your portfolio, too.
What's your favorite way to play Australia? Let me know in the comments.
Daniel Ferry owns shares of Brookfield Infrastructure Partners and Rio Tinto. The Motley Fool owns shares of Brookfield Infrastructure Partners. Motley Fool newsletter services recommend Brookfield Infrastructure Partners and Genesee & Wyoming. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.