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In a market obsessed with Eurozone issues and the U.S. debt ceiling, it is easy to forget the true drivers behind the Australian economy.
Australia’s outperformance of global economies is not simply good luck. It’s not due to rigid banking policy and it’s certainly not due to strong government leadership or top-down decision making. While the RBA’s interest rate policy has maintained the view - from an international standpoint at least - that Australia is in a strong fiscal position, this has come at the expense of equity performance. Accordingly, Australian stocks have not been high on the list of ‘ways to spend my money’ for Australians, who have preferred to reduce debt. On the other hand, in countries with low interest rates such as the U.S., investing in equities remains high on the priority list.
So how has Australia weathered the global financial storm so well?
It shouldn’t come as too much of a surprise: We have the raw materials that developing nations want. It all comes down to supply and demand and right now demand is strong. You won’t hear this statement too often as the mainstream media prefers ‘doom and gloom’ headlines but the reality is that demand fundamentals continue to improve and Australian miners are the beneficiaries. The Australian commodities boom will continue, buoyed by demand from the east, especially from China. China’s rate of urbanisation continues on an extremely steep trajectory and by 2015 is expected to have 106 cities with more than 1 million people, with more than 40% of the population living in them.
Urbanisation in China is rampant. The pace of building and development is so strong the government is having to take steps to cool the economy, despite the rest of the world suffering the most difficult financial period since the great depression! It’s easy to forget the influence China has on Australia with European problems dominating the headlines but the impact Europe has on the strength of the Australian economy is just a fraction of what China means to Australian business.
So what does this mean for Australian Investors?
Australian iron ore miners are cheap and exports are up nearly 30% from October to November.
Take a look at BHP:
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At just $35 BHP represents a cool 30% discount to mid-2011 levels and the only thing that has changed is that the Australian appetite for risk has shrunk due to the European debt crisis.
Rio Tinto paints a similar picture:
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As does Atlas Iron, which has suffered an even sharper fall from grace:
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So unless you see China becoming a desolate landscape of half-built cities with urbanisation coming to a standstill, Australian miners have every reason to be bullish going into 2012.
The Pilbara region accounts for 94% of Australia’s iron ore production and BHP, RIO, FMG and AGO are all great places to add some real value in the closing weeks of 2011.
Stay ahead of the game,
Lachlan McPherson
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