Why You Should Bet on Australia

The Motley Fool has recently opened an office in Australia. To be alerted to all their Aussie stock picks, sign up to receive their free email called Take Stock. We think it's a resource that Australian investors simply shouldn’t ignore. Join the fun Down Under.

If you bought shares of oil companies during the depths of the recession and have held onto it as oil hits $90 and even $100 a barrel, congratulations! You've undoubtedly made a killing and even more if the company you picked has grown production.

But if you're only investing in commodity producing companies and not the countries where those resources are located you're only seeing half the picture. In its 2009 Investment Returns Yearbook, Credit Suisse noted that from 1900-2008, "the best performing markets tended to be resource-rich, New World countries."

Australia stands out
According to the Credit Suisse report the top performing markets over that 108-year period were Australia, Sweden, South Africa, the U.S., and Canada. Other than Sweden, all of these countries were former colonies, had vast natural resources, open trade policies, and managed to avoid the destruction war brings to industrial developments.

If you're looking for a blueprint for long-term success that's not a bad place to start, and that's why South Africa, Canada, and Australia still look promising today. But of those three, Australia stands out because of its proximity to emerging Asian markets and broad basket of commodities that include industrial metals, precious metals, coal, gas, wheat, and barley to name a few.

The metals and energy firms get most of the attention, but Australia's agricultural industry deserves attention to. It is among the world's leading exporters and the long-term demand for fertilizer at home and abroad is why BHP Billiton (NYSE: BHP  ) was so interested in acquiring Potash (NYSE: POT  ) and why Norway's Yara International (OTC BB: YARIY.PK) recently acquired Australia's leading maker of liquid, bulk fertilizers.

Setbacks come and go
The best performing markets all had their off years, and if there's one thing that could reverse Australia's recent success, it's a slowdown in China's economy. China's infrastructure and real estate boom has fueled exports of coal and iron ore from BHP Billiton and Rio Tinto (NYSE: RIO  ) , and boosted demand for liquefied natural gas (LNG) exports from Chevron (NYSE: CVX  ) and Santos (OTC BB: SSLTY.PK). If China's economy slows, these stocks will decline and if China sees a prolonged slump it could lead to financing problems for new LNG developments currently under way.

Pain creates opportunity
We see potential for a slowdown in China this year. But even if it doesn't materialize, there are signs of labor shortages and inflation already starting to appear in Australia's economy. As it stands, some of Australia's LNG projects are already seeing cost overruns, and the recent floods in Queensland have only exacerbated the labor problem.

While these signs of stress in the economy might be bad news at first, they're not a reason for panic. India's infrastructure and energy needs in the coming decade are just as great, if not greater, than China's and its need for reliable supplies of energy are only growing. Australia stands ready to fill that gap and will benefit when China's demand picks up again. In the meantime if these stresses knock down the prices of Australian shares we'll see a better buying opportunity.

Building a watch list on the ground
As an investor looking for more commodity exposure, I can only hope we a slowdown in China's economy and that we get an opportunity to buy Santos, BHP, and others like them for prices far lower than today's. To be ready for such an opportunity takes more than hope and reading annual reports.

In order to prepare for this opportunity, my Global Gains research team and I are traveling to Australia in early February to meet with companies in the energy, agriculture, and consumer industries. Some of these companies are feeding Asian demand, while others benefit from the boost these exports provide to the economy at home. We plan to vet them in advance, so we can load up when the buying opportunity presents itself.

If you'd like to do the same and read all of our dispatches from the field while we're down under, simply enter your email address in the box below.

The Motley Fool has recently opened an office in Australia. To be alerted to all their Aussie stock picks, sign up to receive their free email called Take Stock. We think it's a resource that Australian investors simply shouldn’t ignore. Join the fun Down Under.

Nathan Parmelee is a co-advisor of Motley Fool Global Gains. He has no ownership stake in any of the companies mentioned. Chevron is a Motley Fool Income Investor pick. 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.

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10/28/2016 10:06 AM
BHP $34.71 Up +0.06 +0.17%
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POT $16.53 Up +0.07 +0.43%
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