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Since the Great Recession started to take shape in 2008, one mega-theme has dominated financial markets around the world: the avoidance of risk at any cost. This year, the unexpected mid-year slowdown in the U.S. economy and the spread of the sovereign debt crisis in Europe have served to make risk avoidance investment strategies even more attractive.
This so called “flight to safety” is understandable given the turbulence of financial markets in recent years, but even though steering clear of risk is a top priority for investors, it is a desire more easily expressed than satisfied.
Low-risk assets such as U.S. Treasury debt are in such high demand that yields on the benchmark 10-year Treasury note have been driven down below the rate of inflation. Ultra-safe short term Treasury bills now yield less than 10-basis-points annually.
The ideal solution would be assets based in an economy that is growing strongly, where the government has little debt, the currency is getting stronger, exports are large and growing, and yields pay something worth getting. It wouldn’t exactly hurt if this place also had thousands of miles of beachfront property and cute marsupials that sleep all day in trees.
Sound good? Welcome to Australia.
The Lucky Country, as Australia is often called, has many of the things investors currently want and few of the things they don’t.
Unlike Europe, the Australian government has very low overall debt levels and projects a budget surplus in 2012. Australia’s economy is one of the steadiest in the world, managing to avoid recession for the past 19 years.
Unlike the U.S., unemployment is low and exports are strong as growth in the Asia-Pacific region boosts demand for key products like coal and iron ore.
For U.S. investors, investing directly in Australia has historically been difficult. Exchange traded funds (ETFs) are starting to change that.
While such ETFs are exposed to changes in the Australian dollar, which could decline as the Reserve Bank of Australia moves to lower interest rates, any currency losses could be at least partially offset by gains in local currency asset prices.