Australia: Asia Pacific’s overlooked gem?
Australia: Asia Pacific’s overlooked gem?
Jason Pidcock and Sam Konrad take a look at the attractions of Australia as an investment destination. Has it been unfairly overlooked by global investors?
One of the advantages of investing in the Asia Pacific region is that it is not only home to some of the world’s fastest growing and most dynamic emerging markets, but also some high quality mature developed markets. From an investor’s perspective, this breadth of opportunity provides ample room to build diverse portfolios that can capitalise upon the best the region has to offer. Australia in particular is a developed market often overlooked by global investors, but which in our view is both geographically and demographically uniquely positioned to thrive.
Living in a land down under
“Developed market” and “population growth” are not phrases that naturally go together. Data from UBS and Refinitiv shows that since the turn of this century population growth in the US, UK, France, Japan and Germany has fallen from 1990s levels, coming in consistently below 1%pa on average, with Germany in the 2000s and Japan in the 2010s actually seeing shrinking populations.
Australia, by contrast, has population growth more similar to an emerging market, increasing since the 1990s and holding at 1.5% in the 20 years preceding Covid – making it comparable to India, Malaysia and the Philippines.
Australia, by contrast, has population growth more similar to an emerging market, increasing since the 1990s and holding at 1.5% in the 20 years preceding Covid – making it comparable to India, Malaysia and the Philippines.
Annual population growth by decade
Source: Australian Equity Strategy – 4 reasons why Aussie stocks should stand out over the next decade © UBS 2022”.
This fast-growing population means that Australian companies have an expanding customer base to which they can market their goods and services. Sheer volume of people isn’t enough by itself, however, but crucially immigrants to Australia tend to be wealthy and/or skilled, meaning they can make a meaningful contribution to the economy straightaway. To illustrate this, according to data from the Credit Suisse Research Institute, the median wealth per adult in Australia is US$275,000 – that’s already higher than the UK, France, and even Switzerland, and it’s still rising.
A rewarding environment for business … and investors
A nation’s destiny is, at least to some extent, determined by geography. Australia is clearly a vast country in terms of landmass, while also being geographically remote on a global scale and additionally separated from much of the native English-speaking world by a large time zone differential. This makes doing business logistically challenging, thereby disincentivising new entrants from disrupting the domestic Australian market, while profitability is high for established incumbents in these concentrated industries.
High and sustainable profitability is already an attractive quality for investors, but Australia offers an additional carrot for income-seekers: the dividend yield of listed Australian companies is almost double the global average. This is especially relevant as we enter an era of arguably prolonged slower global economic growth, and gives equity income investors a rich hunting ground for high-yielding stocks without having to make sacrifices in terms of company quality.
Australian companies have also proven themselves to be relatively disassociated from the global economic cycle, at least in terms of their P&L, thanks in large part to their tendency to be more domestic than international focused. That isn’t to say that Australia has entirely de-coupled – certainly natural resources stocks, and to some extent financials – are impacted by the global economic backdrop. But if you strip those two sectors out, then the net profit of the Australian equity universe has less than half the correlation to global GDP growth compared to the rest of the developed world. 1
High and sustainable profitability is already an attractive quality for investors, but Australia offers an additional carrot for income-seekers: the dividend yield of listed Australian companies is almost double the global average. This is especially relevant as we enter an era of arguably prolonged slower global economic growth, and gives equity income investors a rich hunting ground for high-yielding stocks without having to make sacrifices in terms of company quality.
Australian companies have also proven themselves to be relatively disassociated from the global economic cycle, at least in terms of their P&L, thanks in large part to their tendency to be more domestic than international focused. That isn’t to say that Australia has entirely de-coupled – certainly natural resources stocks, and to some extent financials – are impacted by the global economic backdrop. But if you strip those two sectors out, then the net profit of the Australian equity universe has less than half the correlation to global GDP growth compared to the rest of the developed world. 1
Is Australia unfairly overlooked?
Australian equities have been a significant overweight in our Asia Pacific (ex Japan) equity income strategy since it’s inception, both for the macro reasons mentioned above and the individual stock-specific qualities of companies listed there. Yet we often feel like the Australian market is overlooked on a global scale. The reasons why are open to speculation, but it could be because Australia is typically lumped into market indices alongside many emerging markets, making it seem like a curious outlier.
Alternatively, and more justifiably, it could be because investors look at its frothy property market and highly indebted consumers and fear a 2008-style reckoning may one day arrive. We don’t entirely dismiss those concerns (we have little direct exposure to the Australian property market, for example), but for us there a more persuasive evidence on the other side of the ledger – the fundamentals of the Australian economy are extremely strong, with low unemployment, low government debt, and a large current account surplus.
Ultimately, we believe that a combination of forces will shine favourably on Australian equities over the coming years, and we anticipate that its market will outperform many of its regional and global peers. As such, it remains the largest single country weighting in our portfolio.
Alternatively, and more justifiably, it could be because investors look at its frothy property market and highly indebted consumers and fear a 2008-style reckoning may one day arrive. We don’t entirely dismiss those concerns (we have little direct exposure to the Australian property market, for example), but for us there a more persuasive evidence on the other side of the ledger – the fundamentals of the Australian economy are extremely strong, with low unemployment, low government debt, and a large current account surplus.
Ultimately, we believe that a combination of forces will shine favourably on Australian equities over the coming years, and we anticipate that its market will outperform many of its regional and global peers. As such, it remains the largest single country weighting in our portfolio.
1 Source: Australian Equity Strategy – “4 reasons why Aussie stocks should stand out over the next decade © UBS 2022”.
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