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Australia Anti-Inflation Stocks

Written By Brian Hicks

Posted February 4, 2008

A perfect storm of crisis and opportunity is brewing down under.  Last week, a confidential memo called the Red Book was leaked to the press, and its instructions lay out Australia’s profit potential clearly for global investors.  Here’s the story and 4 tickers to play it.

Resource-rich Australia is benefiting heavily from China’s resource appetite, and the country’s budget surplus has grown to A$18 billion (about 16.35 billion USD).  Now, recently-elected Prime Minister Kevin Rudd is charting a course away from commodity-driven global inflation.

Last Friday, February 1, Australian media obtained leaked copies of a national treasury report to Rudd’s office.  The Red Book, as the routine briefing for incoming Aussie PMs is known, is a stark statement about Australia’s future.

It also lays out a massive profit-creating scenario for savvy global investors.

The Red Book’s basic message is that Australia stands at a "pivotal economic juncture," some 16 years into an economic boom that included the Sydney Olympics and a realization that the only continent-country is no longer the world’s boondocks.

The country’s head honcho on budget issues, Treasurer Wayne Swan, told Australian Broadcasting Corp. radio that inflation, which hit 3.6% in the fourth quarter of 2007, must be attacked through modernizing the economy and taking on the "twin investment deficits" of skill shortages and infrastructure logjams.

Australia Wants Quality, Not Just Quantity

Australian inflation is far above the official 2-3% target range, and even surpasses the 3.3% average for the Organization of Economic Cooperation and Development (OECD, a.k.a. the "rich countries’ club").

China and India, just across the Indian Ocean from Australia, want Australia’s resource bounty to fuel their stellar economic growth and satisfy their appetite for energy supplies and raw materials.

Rich in aluminum, coal, and iron ore, Australia’s got more than just chunky commodities underground.  

At the beginning of 2007, the Labor Party that was then the opposition in Parliament pledged A$50 million to subsidize exploration for geothermal energy resources.  Geothermal, sometimes called simply Hot Dry Rock (HDR) energy, is abundant in Australia, but investment has lagged the intense increases we’ve seen in fossil-fuel energy prices in recent years.

Since energy prices are driving so much of today’s inflation, which Rudd calls "public enemy #1", power is a prime focus of the leaked Red Book report.

After all, the first stroke of Kevin Rudd’s pen after being inaugurated was to sign Australia onto the Kyoto Protocol, the landmark emissions-reduction pact initiated at the turn of the 21st century.

The Red Book says that for Kyoto and other emissions targets to be met, "the energy profile of the economy will have to be fundamentally changed."

This means business for Ormat Technologies (NYSE:ORA), a geothermal energy giant that has tapped resources from Nevada to the Outback.  Ormat has slumped along with the broader market this month, but as our green energy guru Jeff Siegel will tell you, many alternative power plays like Ormat are trading at a heavy discount.

That goes doubly for industries like geothermal where heavy state subsidies can pad a company’s top-line during exploration.  The risk is low, and the potential is colossal.

Across the board, Australia is set to keep its growth going.  While companies like Melbourne-based BHP Billiton Ltd. (NYSE:BHP) are busy shipping minerals, oil, and gas over to China and other big developing countries, Rudd and his counterparts in the Treasury want a stable base that makes best use of Australia’s current "demographic sweet spot," as Australia has a higher percentage of the population at working age (15-64) than any time in more than a generation.

For plays on Australia’s smart economic policy moving forward, I like the iShares MSCI Australia Index Fund ETF (NYSE:EWA), which has consistently doubled the Dow and logged nearly a 200% gain in the past five years.  This ETF doesn’t just cherry-pick energy and commodity plays.  Instead, banks and retail stocks make up the bulk of EWA’s key holdings, leaving the volatility of commodities behind.

And for a pure play on the Aussie dollar, check out the CurrencyShares Australian Dollar Trust (AMEX:FXA), an ETF that makes it easy for you to benefit from Australia’s national financial health as the U.S. dollar gets pummeled.

However you play it, the Red Book makes it clear that you can’t afford to stay out of Australia’s ongoing growth story.



Sam Hopkins