Why Now Is the Time to Add Australia to Your Portfolio

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There weren't many developed countries that managed to dodge the worst of the financial crisis, but Australia was one of them.

With strong ties to over six billion emerging market customers yearning to adopt a more Western lifestyle, "The Land Down Under" has been left relatively unscathed.

And with interest rates that are above inflation and a veritable treasure trove of much-needed natural resources to rely on, Australia will enjoy prosperity for decades to come.

Unlike the rest of the West, what's going on there is a bona fide growth story.

In fact, according to the Economist's team of forecasters, Australia's GDP is expected to grow 2.7% in 2013.  Among the world's "rich countries" that's only behind the East Asian trio of Singapore, South Korea and Taiwan -- all of which are expected grow at 2.9%-3% this year.

Australia is also doing significantly better than the other Western mineral-rich economy, Canada, which is expected to grow by 1.9% in 2013.

No Helicopters Here

The really good news is that Australia has achieved this success without resorting to misguided "stimulus" policies. Australia's budget is forecast to be in surplus for the 2012-2013 fiscal year -- something completely foreign to most Western countries. And if this gets missed (an election is expected in September, after all) it's likely not going to miss by much.

Australia's monetary policy is sensible, too. The Reserve Bank's policy rate is 3.0%, while Australian inflation has been only 2.2% over the last 12 months. No place other than South Korea is running its finances and monetary policy at this level of soundness.

All this is being achieved with a left-of-center government with a tiny majority, led by Julia Gillard, which has been in office since 2010. While there have been some silly impositions like a new tax on the mining industry, it says a lot for Australia that even a left-leaning government can resist the temptation to play the silly "stimulus" games being played in other countries.

Of course, if the center-right Liberal/Country Party coalition wins in September (as the opinion polls are forecasting), we can expect some tax cuts and maybe faster growth.

There's really only one problem in Australia. It's the balance of payments.

A paragon of good management like Australia naturally attracts hot money, and that has pushed the exchange rate up by about 6% in the last year. As a result, Australia is running a payments deficit of about 5% of GDP, financed by inflows of foreign capital into both Australian investments and the government bond and money markets.

How to Invest in Australia

However, Australia's great strength is its mineral resources, which have proven very attractive indeed as the Chinese economy has ramped up.

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