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Global ETF Briefing
Australian Economy Is Election-Proof
Carl Delfeld, Chartwell Advisor 11.24.07, 11:19 AM ET

Down under, politics is played as roughly as rugby. There are no
helmets and there are even no holds barred.

For the last 11 years, Prime Minister John Howard and the Liberal/
National Party (conservative) have held sway, wielding the club of
lower taxes. But the opposition Labor Party under the leadership of
Kevin Rudd is expected to come out on top on during this election.

What will be the impact of Rudd's meteoric rise on the Australian
economy and stock market? Let's put it in perspective.
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From a few convicts dropped ashore in 1788, Australia has developed
into a first class global economy. The reforms enacted by former Prime
Minister Bob Hawke and Treasurer Paul Keating during the 1980s set the
stage for a remarkable run of prosperity. Specifically, they slashed
import tariffs, floated the currency and reduced the power of big
labor.
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John Howard, who has led his party to victory four times, has
continued and expanded these reforms riding a wave of economic growth:
14 years of uninterrupted 4% to 5% growth. The national debt has
virtually been eliminated; the currency is strong, the government
recently signed a free trade pact with the U.S. and is starting to
negotiate a pact with China. Australia received $52 billion in foreign
direct investment in 2006.

Why would any voter want to make a change after this spectacular
record? Part of it is the feeling that a change in leadership is a bit
overdue. Even Howard has said that, if victorious, he would step down
before 2010. Not a strong position.

Next are the country's rising borrowing costs with six rate hikes by
the Reserve Bank of Australia since 2004, putting the benchmark short-
term rate at an 11-year high. The last hike was just last week forcing
Howard to apologize for not keeping his pledge to keep rates flat.

Then after Howard and company announced a nice tax cut program, Labor
hit back with their own hefty tax cut agenda, neutralizing this potent
issue.
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Rudd has also run a shrewd campaign, which has reassured voters that,
as an economic conservative, he will keep the country's finances in
order. A Mandarin-speaking former bureaucrat, he has been careful on
the campaign trail to avoid the egghead label by dwelling on bread and
butter issues like health and education.

Normally, a Labor win would not be good for the stock market but this
time the impact of a less conservative government might be muted by
several factors.

First, the higher rates are dampening inflationary pressure and
keeping the Aussie dollar at 23-year highs against the U.S. dollar.
This supercharges returns for dollar-based investors. Economic growth
remains strong as the economy seems to be able to weather its own real
estate bubble. Australia's compulsory pension program accounts for
almost two-thirds of the stock market's $1.6 trillion market value,
also providing some support for the market.
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Australia's stock market is trading at 15.5 times earnings, according
to data from Thomson DataStream, which is not unreasonable. The
country continues to sit on the sweet spot of the commodity and China
growth stories. Financial and energy/resource stocks account for a
remarkable 60% of the market, a number similar to that in Canada. Plus
the BHP Billiton (nyse: BBL - news - people ) play for Rio Tinto
(nyse: RTP - news - people ) will continue to attract attention to the
market.

The largest holding of the iShares MSCI Australia Index (amex: EWA -
news - people ) is BHP Billiton, which believe it or not has a market
value larger than that of Coca-Cola (nyse: KO - news - people ): $207
billion vs. $145 billion. BHP underscores Australia's strength as a
resource rich country. Australia is a leading supplier of core
steelmaking raw materials, the world's second-largest copper producer,
the world's second-largest exporter of energy coal and a significant
producer of oil and gas.

Private equity firms expect plenty of action in 2008, not least
because many have raised record funds for the country and the region
and Australia remains the easiest market in Asia-Pacific in which to
deploy large amounts of capital.

There remain plenty of domestic consolidation opportunities.
Australia's resources sector is still white hot, with scores of
midsized companies seeking to merge with one another in anticipation
of takeover approaches by energy-hungry companies from places such as
China and Russia. Australian companies are also aggressively seeking
strategic opportunities abroad to tap markets such as China, Indonesia
and India.

The party that prevails will affect the current market reform agenda.
Take the government run health care sector. If the Conservatives
retain power, it plans to push ahead with the listing of Medibank
Private, the state-owned insurer. The government last year opened up
the media sector, allowing for greater cross-ownership. Investment
banks are also jockeying for position for the privatization of the
power assets belonging to the state of New South Wales, which could
raise more than $20 billion Australian.

Let's just hope that, whomever wins the election, the market reforms
and economic growth and prosperity continue.
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Carl Delfeld is editor of Chartwell Global ETF Advisor. For more
analysis and ETF portfolio recommendations, click here to learn more
about Chartwell.