For a central banker, Glenn Stevens, Governor of the Reserve Bank of Australia, talks remarkably straight. “I think it’s a mistake to assume that a riskless, easy, guaranteed way to prosperity is just being leveraged up into property,” he says. “It isn’t going to be that easy.” Sound advice. But he’s not just a talker – Stevens is taking action that is proving good for Australia and its currency. And that means there’s money to be made by investors.
For as long as Bank of England chief Mervyn King still frets about a double dip, Britain’s base rate will stay at just above zero. The longer it stays there, the more the weakening pound will remain under pressure. So foreign investors are getting very little reward for holding sterling right now.
But things couldn’t be more different in Australia. Almost everyone else in the world has struggled to escape the worst slump for years. Yet in Australia, nearboom times have returned. Last quarter’s growth was the fastest for almost two years, with the biggest job surge for three years. January’s building approvals were 60% higher than 12 months before. Business confidence has accelerated, which is reflected in machinery and equipment spending soaring by almost 11% last quarter, compared with the previous three months.
In short, Australian firms are making money, so the Australian dollar has surged. It recently hit a 25-year high against the pound. And there’s more to come. “The question now is not whether growth will be sustained, but rather how strong it’ll be in 2010,” says Brian Redican at Macquarie Group.
But there’s a flip side. Firms may soon “encounter the side-effects of strong growth”, says Redican, “such as labour shortages and industry bottlenecks”. For example, higher wages are being paid to attract staff – and are filtering into the property market. Despite Steven’s sobering words, house values are up 11.8% in the 12 months to January 2010. “Housing shortages, low interest rates and speculative fervour have turbo-charged house prices,” says Adele Ferguson in the Sydney Morning Herald. Indeed, “60% of investors believe Australia has a property bubble”.
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However, Stevens has already shown he’s a central banking tough-nut. Since last October, he’s raised the benchmark cash rate by a third to 4%. Now he’s promising similar medicine. “It wouldn’t do people any favours to have a prolonged period of very low rates, then hammer them unexpectedly,” he says. “You shouldn’t assume that [rates] will stay that low – because that assumption will prove unfortunate.” In other words, another rate hike next month is on the cards. Throw that into the mix alongside the much stronger Australian economy, and the Australian dollar seems very likely to keep climbing against sterling.
So snapping up assets down under seems to make sense for the British. But although many of the cyclical stocks that have soared may look tempting, there are big gains to be made by income investors from Australia’s economic growth.
With company profits rising, dividend payments are looking safer, while payout increases are more likely. Better still, as Tim Rocks of Merrill Lynch points out, Australian defensive stocks (say telecoms and utilities) have been largely left behind and now stand on their highest-ever yields compared with the rest of the stockmarket. We look at two highyielders in the box below.
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