Oxenuk Management LLC Introduces Thinking Outside of Asia: Australia

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The economic issues of inflation, excess money supply and overheating economy in emerging Asian countries create considerable risks for investments in the region. Oxenuk Management LLC suggests investors consider participating in Asian economic growth by investing in Australia, a choice that will help limit the economic risks while keeping exposure to the regional growth.

Emerging Asian countries were the major drivers of the global economic recovery. Not surprisingly, the vast majority of their stock markets provided blossoming returns in 2010. Yet, with the increase in influx of money and inflation pressures, the majority of Asian countries have certain difficulties with tightening their monetary policy. China has just increased the bank reserve requirement ratio to 19.5%, in addition to the three interest rate increases since October of last year. The market expects the Chinese interest rate hikes to accelerate in the near future as these monetary measures in coupe with other administrative actions are failing to tame the inflation and money supply. India increased its interest rates seven times since the beginning of 2010, but managed to cool the industrial production to a mere 1.6% in December with inflation remaining at 9.5% in the same month. Indonesia, Philippines and other Asian developing economies face similar problems of inflation, excess money supply and overheating economy.

These economic issues in Asian countries present a question for an investor: Which countries are capable of implementing a monetary policy to balance out the inflation and economic growth? Oxenuk Management, LLC has reviewed the recent developments and macroeconomic perspectives of the region and come up with the distinctive candidate. Oxenuk Management LLC recommends participating in Asian economic growth by investing in Australia, a choice that will help avoid the majority of inflation and inadequate monetary policy risks.

Australia offers diversification in two dimensions to investors looking to invest in Asia-Pacific region. First, Australia is a developed country and has a sound, and most importantly, consistent recent history and future outlook for growth. Second, its excellent resource base and crucial geopolitical location give the country exposure to the whole emerging Asian region.

During the global recession, Australia experienced only one quarter of negative growth. The country grew 2.1%, 1.2% and 3.0% in 2008, 2009 and 2010, respectively. Australia suffered severe flooding this past December-January, which will cut 2011 first quarter GDP by as much as 1 %. Despite the flooding damage, Australia’s Central Bank confirmed its forecast of 4.25% GDP growth for 2011 on February 17th. At the same time, the weather hazard increased Central Bank’s outlook for annual inflation to 3% by June from the originally projected figure of 2.5%. This change is still consistent with central bank’s target in a range of 2-3%. Australia’s monetary policy is handled in a timely and balanced manner. Australia was first to proactively raise the interest rates by bringing them from 3.0% in September of 2009 to the current level of 4.75%. Presently, the new interest rate is far below its peak level of 7.25% in mid 2008.

There are some concerns with the soaring of the Australian dollar and its negative impact on exports. The Australian currency appreciated from 1.55 to parity against the US dollar in the last couple of years. Nonetheless, the composition of its GDP moderates the risk. Australian household consumption expenditures compose more than 50% of the GDP. Coupled with down trending unemployment figures, the household consumption should provide a solid ground for sustainable internal growth. Australian unemployment peaked at 5.8% during recession and has already come down to 5.0% in December of 2010.

In international trade, Australia thoroughly benefited from Japan’s ascent by being the main supplier of Japan’s commodities. Now, with the emergence of China and India, Australia quickly adjusted for the new markets. In 2009-2010 Australia’s major export destinations were China with 23.1%, Japan with 18.5%, Republic of Korea with 8.2%, and India with 8.1%.

Major Australian exports include coal, gold, iron ore and concentrates. Goods and services exports accounted for 22% of Australian GDP in 2010. Australia is the world's largest net exporter of coal, accounting for 29% of global coal exports. According to the research performed by KPMG, the coal will continue to represent the major source of power generation in India, with a share of 67.8% in 2020, showing little change from current levels. Recently, the Chinese government asked its coal mining companies to freeze the coal contracts prices with power companies at the 2010 levels as the soaring coal prices are creating inflationary pressures among electricity producers. Furthermore, iron ore is the key ingredient of various metals that are used in the infrastructure projects and represented in a wide range of industries from automobiles to domestic appliances. Upward pressure on commodity prices is expected to persist in near future, due to continued robust demand from emerging countries. That said, an investor can benefit from the increase in consumption in fast growing Asian countries by investing in Australia.

One may argue that with the end of recession, the majority of the Asian governments will end their infrastructure stimulus programs; however, IMF’s recent outlook expects the developing Asia to grow 8.4% in both 2011 and 2012. This growth is a deserving substitute that compensates for the lack of government infrastructure spending and provides further demand for the commodities. Not to mention, urbanization and the increase in the income of around 2.5 billion people of combined India’s and China’s population will impose strict limits on the cutting of infrastructure improvements.

To conclude, Australia provides both the internal growth stability and the exposure to emerging Asian markets. Unfortunately, there are a limited number of Australian issuers trading in the U.S. markets, with BHP Billiton and Rio Tinto among the few. Good investment alternatives are the Australian broad market ETF indexes. Currently, Australian broad market has P/E ratio of 14.3 and dividend yield of more than 3%. Given the outlook for Australian growth, the current valuations provide a sound investment opportunity.

By Kubat Akmatov
Oxenuk Management, LLC

Oxenuk Management, LLC, a Registered Investment Advisor, offers asset management services to individual and institutional clients, focusing on investment strategies in industrial and regional markets.

Contact information:
2770 S. Maryland Pkwy Suite 302, Las Vegas NV, 89109.

Oxenuk Management LLC is authorized to offer its investment advisory services only to clients in the states where it is registered (currently Nevada and New York).

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Kubat Akmatov
Oxenuk Management LLC
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