Confirmation bias can be dangerous, so I'm not a regular reader of the fancy research reports pushed by the big investment banks. That said, when I was forwarded a copy of Morgan Stanley's Investment Ideas for 2011, I wasn't at all surprised to read that seven of its top 10 ideas were a play in some shape or form on continued growth in emerging markets.
But of particular note in their report for me was their bullishness toward "resource-rich countries."
It's good to have stuff
Foreseeing "growth in excess of 6% in 2011 for [emerging market] economies," Morgan Stanley notes that "Equities in commodity-rich countries -- in particular, Australia, Canada and Norway -- are well-positioned to benefit." This sentiment was echoed in Don Coxe's 2011 outlook when he wrote, "We remain of the view that one should invest in what those vigorous Asian economies need to buy." Similarly, I wrote to Motley Fool Global Gains members at the end of 2009 that over the next five to 10 years "Countries with stuff will do better than countries without it -- with 'stuff' being metals, minerals, food, oil, and gas."
When one starts thinking about countries that have stuff, Australia is at the top of the short-list.
Land down under ... of stuff
Australia is the world's largest exporter of coal, second-largest producer of iron ore (90% of which is exported to Asia), and an important source of petroleum, aluminum, and natural gas. All told, minerals and fuels accounted for more than 25% of Australia's $218 billion worth of exports and commodities account for seven of Australia's top 10 exports.
Yet despite my desire to invest in stuff, Asia's rising consumption of stuff, and Australia's wealth of stuff, I have somehow yet to recommend or buy for myself a single Australian stock. I've looked at Canada, of course, buying shares recently of Canadian Oil Sands Trust and putting Canadian Natural Resources (NYSE: CNQ) and Canadian National Railway (NYSE: CNI) -- good companies that I would love to own at the right price -- on my watch list. But Australia has at least one advantage relative to Canada -- it's a whole lot closer to Asia.
What to do with this information
Given these facts, I've resolved to increase my exposure to Australia this year. It's an economy that should continue to benefit from growth in Asia, but doesn't offer the same level of political and governance risk that comes with investing in China or India.
There's a problem, however, in that the major U.S. exchanges aren't exactly swimming with overlooked Australian companies. The main commodities play, mining giant BHP Billiton (NYSE: BHP), is well-covered by the investment community, and the big banks, such as Westpac (NYSE: WBK), don't look at all attractive given Australia's precarious housing market.
A few names to consider
One opportunity is to invest via Canadian holding company and Global Gains recommendation Brookfield Asset Management (NYSE: BAM), which along with subsidiary Brookfield Infrastructure Partners (NYSE: BIP), purchased a stake in Australia's Dalrymple Bay Coal Terminal from distressed seller Babcock & Brown in 2009. Dalrymple Bay is the world's third-largest coal shipping facility, and Brookfield is already at work expanding the facility because, as Brookfield CEO Bruce Flatt noted at the end of 2009, "The commodity boom is something that is going to happen for the next 25 years." He further added about his willingness to deploy capital down under, "Our view is that if you're a foreign investor and looking at Australia, it's an attractive place given the size, the amount of resources, the fiscal situation, and the rule of law."
Dalrymple Bay, in other words, is an asset that will benefit from the massive long-term tailwind of the need for coal in Asia and Brookfield thinks it was smart to buy when short-term sentiment had become bearish. Coal prices are up since then, but Australia's coal industry finds itself in trouble today again due to the recent flooding in Queensland state. The government there recently estimated that Australia's coal industry lost 15 million tons, or 20% of its overall production, in the quarter -- a reality that will depress earnings for coal miners and for Dalrymple Bay.
This has caused area miners such as MacArthur Coal to lower their guidance, and Australia overall is estimating at least a $2 billion drop in coal export sales. That's a big number, and we could see stocks in Australia drop as that decline flows through to mining services companies and ultimately the Australian economy.
Temporary setback, permanent opportunity
Weakness in Australia's mining industry in the first calendar quarter will ultimately be offset by the 25-year boom that Brookfield's Bruce Flatt mentioned above. That's one reason why our Global Gains research team is heading to Australia in early February to sit down with managers a variety of promising companies -- some affected by the recent flood -- that will benefit from Australia's growing commodity trade. I'm excited to do so because it's an idea that makes too much sense. Not only is Australia an attractive market for the reasons mentioned, but -- and maybe this is true of you as well -- I am dramatically underexposed to it.
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