Will Australia's Boom Create a "Golden Age"?

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What Is Up Down Under?

Will Australia's Boom Create A "Golden Age"?

By Robert Scharar & Wes Yuhnke

Fund Managers of the Commonwealth Australia/New Zealand Fund (CNZLX)
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Dr. Ken Henry, Australian Secretary to the Treasury, recently proclaimed that Asian demand for resources based on population growth would create a "Golden Age" for the Australian economy that could last until 2050. He states structural changes in the economy "more profound than anything in history" that could lead to a period of "unprecedented prosperity".

If you believe the enormously populated Asia/Pacific region is going to experience growth, who is better positioned to deliver to those markets? Clearly, Australia and New Zealand are closer and in time zones compatible with the Asian regions while the U.S. and Europe are at a disadvantage. Although, historically, trade is often measured in terms of how countries trade with the U.S. with its large consumer economy, the question really should be how competitive companies will be with the U.S. in the Asia Pacific region?

Ranking as the fourteenth (World Bank 2008) largest country in the world, Australia is internationally recognized as a well managed economy with strong economic fundamentals. Amongst the advanced (or developed) economies, Australia is the only one to have avoided a negative year-ended growth rate during the global downturn. While activity did contract in the final quarter of 2008, it is likely to have grown by around 2 per cent in 2009. The Reserve Bank of Australia's economic growth estimates is for the economy to grow annually by around 3.25% to 3.5% over the next couple of years.

Looking forward, the central scenario for most of the developed economies remains a subdued recovery. It is likely that many of the developed economies may continue to be weighed down by the desire of households to reduce leverage and increase savings.

The picture in Asia is very different. A number of economies have had near V-shaped recoveries, which is particularly evident in the data for industrial production and trade. Unemployment is coming down and, unlike in the developed economies, core inflation has troughed and is starting to increase. The recovery has been strongest in China, with the economy growing by 8 per cent last year. This strong growth has also provided a boost to many other economies in Asia and beyond, with Chinese imports having increased rapidly.

This two-speed world represents a very interesting backdrop for the Australia economy. There remains some risk that developments in the developed economies could again derail growth in the global economy. But the more likely scenario remains a relatively subdued recovery in the developed economies and stronger growth in Asia, with domestic demand in the region making a greater contribution to growth than has been the case historically. If this is how things play out, the Australian economy is well placed. Around 70 per cent of Australia's exports now go to Asia and the strong growth in the region has supported commodity prices.

Australia is an export oriented and resource based economy. It still maintains its position as one of the world's leading exporters of primary products. The country is renowned for its competitive raw materials but the economy actually has a broad range of competitive industries, including high technology, manufacturing, research and development, along with financial and many other services including its services sector which is highly competitive, deregulated and privatized. Australia's ideal location strategically positions it to tap into the expanding Asia Pacific marketplace.

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Robert Scharar is Fund Manager and Wes Yuhnke Assistant Portfolio Manager of the Commonwealth Australia/New Zealand Fund (CNZLX).

Mr Scharar is President and Wes Yuhnke Chief Investment Officer of FCA Corp., a registered investment adviser and fee only financial planning firm located in Houston Texas. For more
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information on business and investing in the Australia/New Zealand marketplace call

(713) 781.2856 or go to www.commonwealthfunds.com.

Will Australia's Boom Create a "Golden Age"?

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