Profits down under

Carl DelfeldIs Australia an Asian country? An emerging market country? A commodities play?

Australia has always been known as the “lucky” country due to its ample natural resources, beautiful weather and wonderful fun-loving people. A 2010 United Nations survey also ranked Australia second behind only Norway in terms of best countries to live in, measuring a variety of factors including wealth, security, equality and happiness.

But what changed the picture of Australia from a laid back paradise for golfers and beach bums to a premier go-go global growth story?

In a word – China.

In a phrase – Asian emerging markets.

More specifically it is China’s and Asian emerging markets need for Australia’s abundant natural resources that enabled the country to largely avoid the brunt of the recent global financial crisis. In addition to commodities, the region also appreciates what Australian offers in terms of finance (comprising 40% of Australian stock market) technology and political stability.

Australia’s Asian Tilt

China is Australia’s largest export market, followed by Japan, South Korea, India and the United States.

Asia is the destination of 72% of Australia’s exports (up from 40% in 2000) and China’s share of total Aussie exports has quadrupled to 25%.

To further strengthen trade relations with Asia, Australia signed a Free Trade Agreement (FTA) with the ten-country grouping in Southeast Asia (ASEAN) and is also negotiating FTAs with China, Japan and Korea. In addition, Australia is conducting feasibility studies for such trade agreements with India.

On the energy side, booming Asian demand is a catalyst for a surge in energy infrastructure. Unemployment fell to 4.5% in Western Australia, site of Chevron Corp.’s ($42 billion) Gorgon liquefied natural gas project.

In Queensland, BG Group Plc is building a $15 billion LNG venture, generating 5,000 construction jobs. BG, Chevron, Royal Dutch Shell Plc and ConocoPhillips are among energy companies investing about $200 billion in proposed LNG projects in Australia.

Eat your heart out America – Australia’s jobless rate has fallen to 5.2% from 5.4% even as more people entered the workforce. In response, the Reserve Bank of Australia kept the key benchmark rate steady at 4.75%, citing the need to fight pending inflation.

Economic ties between Australia and Asia have broadened from the resources sector to other sectors. Just one example, Matthews funds reports that a Melbourne-based insurance firm entered into an agreement with the largest bank in China to jointly develop and distribute life insurance products there.

The iShares Australia ETF (EWA) allocates almost 45% of its assets to financial firms, with the next closest allocation coming in at 25% for industrial materials. Although the fund’s top holding is in mining giant BHP Billiton (BHP) which is on the Value Bounce’s watch list, the rest of the top five consists of banking firms. But don’t be fooled, these major banks have deep tentacles in and have significant exposure to commodities and energy.

In short, Australia is a great high-quality proxy for the Chinese and Asian economic wave. As long as this tide stays strong, Australian companies will surf right along.

Opportunity awaits,

Carl Delfeld.

Note from Midas Legacy Editor: We’re honored to have Carl Delfeld on our expert panel. Carl is founder of several financial organizations around the world, and he has advised the US senate and the US Treasury among many other large names. He is also the author of three investment books. Carl’s stock recommendation service, The Value Bounce, is the result of all his experience and research as he cherry-picks trades that allow you to have your cake and east it.

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