Invest down under: Why Australia's an overlooked investment opportunity - and it's nothing to do with oil and mining

 
Annabelle Williams
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Australia's backing a tech boom and Sydney's becoming the cultural capital of the world (Source: Getty)

Australia has the enviable honour of avoiding recession for nearly 25 years. It’s well known for having plentiful natural resources and a thriving oil and mining sector, and its proximity to China made it the chief supplier of commodities to the Asian giant during its manufacturing and construction boom.

But the abundance of stuff to take out of the ground isn’t all that makes Australia’s economy strong.

Beautiful weather and a high standard of living draw workers from all over the world, allowing the government to cherry-pick the best talent. Its unique position on the southern edge of the planet means Australia has traditionally been detached from world events, so global crises have less of an impact. It was one of only two major nations to avoid a recession during the financial crisis.

However, the perception that Australia is dependent on the wax and wane of commodity prices is one reason why many investors haven’t investigated the opportunities it offers.

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The prices of all kinds of resources, from sugar to oil, have collapsed in the last two years, and producer countries that are heavily reliant on exporting them – such as Russia, South Africa and Brazil – have sunk into recession. Australia is a different story. Even though commodities have collapsed, its economy expanded by 3 per cent in 2015. “The Australian economy has proved relatively resilient in recent years, despite steep falls in commodity prices and weakening Chinese demand,” says Kevin O’Nolan, a portfolio manager at Fidelity Solutions.

Read more: Is the age of oil coming to a close?

In reality, mining represents only 8 per cent of its overall economy, says Jason Pidcock, a fund manager at Jupiter Asset Management. “Australia’s wealth of natural resources lead many investors to assume its economy is dependent on natural resources. But the facts tell a different story,” he explains.

The economy has been helped along by the New South Wales and Victoria regions, which are doing well, says Rob Marshall-Lee, head of Asia and emerging markets at Newton.

He says Australia stands out as a great investment opportunity right now. “While many investors shy away from Australia as an investment destination because of its association with commodities, we have dug deeper to find companies which can deliver attractive total returns,” he says.

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As an English-speaking hub with a more benign political environment than many countries in the region, it’s attractive on many fronts. Tourists flock to Asia and the growing numbers of Chinese who became wealthy through the boom years are heading to Australia on holiday.

Affluent Asians are increasingly sending their children down under for a Western education, and have an insatiable demand for English language classes and learning materials. “A better way to access China’s continuing growth is by investing in businesses outside China that can benefit from this newfound prosperity,” says Jupiter’s Pidcock.

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His fund is invested in more than a dozen companies in Oz, including Sydney Airport, Scentre Group, which runs Westfield-branded shopping centres in Australia and New Zealand, and Vicinity Centre, a real estate company.

Like other developed nations, it has well-established businesses on its stock market which pay dividends. Josh Crabb, a fund manager at Old Mutual Global Investors, invests in Australian banks as they pay out steady dividend streams to shareholders. He also likes the country’s thriving smaller businesses.

“There are some exciting opportunities among the small and medium-sized enterprise sector, where technological innovation is starting to gain traction. Companies in the internet of things arena look particularly compelling,” Crabb says.

There are risks to investing in Australia, though. Its property market is cooling following a period of rapid price increases – which, like the London market, was partly down to overseas investors coming in and splashing the cash.

“Australia remains vulnerable as the housing and investment booms reverse, with the country also suffering from an over-levered property market,” O’Nolan says. He also highlights the risk from China. If it begins to slow sharply, it could mean a rapid fall in demand for Australian exports and a pull-back from wealthy Chinese investing in the economy.

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