Australia’s Credit Beats Out U.S., Europe
With its credit beating out U.S. and Europe, here's a look at what makes things so fiscally safe down under, and how you can get a piece of the Australian investment pie.

It’s kind of funny when you think about it — Europe and America can’t meet their debts and still are reeling from the misbehavior of crooks in high finance, and meanwhile the former penal colony of Australia is now seen as one of the most trustworthy places to invest in the world.

Australia was upgraded by Fitch Ratings to the highest possible level — AAA — a few days ago and now owns top marks from all three rating firms on top of its existing elite status with Standard & Poor’s and Moody’s.

Meanwhile, there are rumblings that Fitch might go the other way on America and downgrade its sovereign debt to AA+ like S&P did back in August. No knock is looming for U.S. credit, however, since Fitch has said a downgrade likely wouldn’t come until 2013 even if the status quo continues.

What’s more, it’s not just the European also-rans like Italy and Greece that are embroiled in debt woes. France also is at risk of losing its top-tier AAA rating with S&P soon. There was a false alarm in early November where the ratings agency “mistakenly” downgraded France, but rumors are that one of the three firms will make that move eventually (and correctly) in the next few days.

What gives? Why is Australia such a safe borrower as more developed nations continue to feel the burn?

The most obvious reason is that Australia spends much more responsibly than the U.S. and Europe. The country’s net external debt was 53% of GDP in 2010 — while Italy currently is struggling under 120% debt-to-GDP, the U.K. is approaching 80% debt-to-GDP and and many estimate the U.S. is nearing a 100% ratio.

It also helps that the nation has a vibrant economy thanks to its close proximity to emerging markets in Asia, and strategic partnerships with China helps a great deal. Australia has been able to tap into the economic might of Asia — and is one of the few major economies that avoided the technical definition of a recession amid the financial crisis. Just barely, of course, since its economy grew a mere 0.4% in the first three months of 2009 — but the textbook guidelines for a recession are two consecutive quarters of GDP contraction, and the tiny gain was enough to avoid the dreaded “R” word.

The nation also is very rich in natural resources. Australia is a major exporter of agricultural products like wheat, minerals like gold and energy commodities such as coal. Mining and agriculture make up more than half of Australia’s exports. While other countries have waxed and waned based on specific industries — housing, technology and the like — Australia has benefited from baseline demand in food and energy that never evaporates, even during a downturn.

How to Invest in Australia

There are two Australian ETFs to play the region. The first is the liquid iShares MSCI Australia Index Fund (NYSE:EWA), with more than $2 billion under management. The next is the tiny, volatile Index IQ Australia Small Cap ETF (NYSE:KROO), with an ultra-small level of assets and very thin daily volume. Be warned: Both Australia ETFs are down by double-digits this year.

If you’re hunting for stocks down under, Some of the biggest ADRs trading on American exchanges include:

  • Small-cap aluminium miner and smelter Alumina Limited (NYSE:AWC), which has been brutalized with a loss of more than 40% so far in 2011 — similar to big players like Alcoa (NYSE:AA).
  • Materials giant BHP Billiton (NYSE:BHP), which deals in everything from base metals to uranium to diamonds to coal.
  • James Hardie Industries (NYSE:JHX), a small-cap construction stock with a $3 billion market cap but a mere 1,000 shares traded daily.
  • Samson Oil & Gas (NYSE:SSN), an oil and gas exploration firm with a market cap of just $150 million — but gains of 35% so far in 2011.
  • Westpac Banking Corporation (NYSE:WBK) is the $61 billion bank that dominates lending in Australia and New Zealand. Unlike U.S. financials, Westpac has managed to reclaim pre-financial crisis levels and has remained largely insulated from much of the broader banking turmoil.

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace​.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.


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