Australian Lessons for More Income & Growth
January 09, 2020
With the US economy continuing to grow throughout 2019 and projected to expand through 2020, many are becoming concerned about the viability of keeping the world’s largest economy on the boil.
In addition, many questions remain about whether the US economy can continue to grow with controlled inflation, which supports better stock and bond prices after such a long run.
US GDP Annual Growth Per Quarter—Source: Bureau of Economic Analysis & Bloomberg
But again, core inflation in the US remains very low with few to no signs of rising significantly.
The core Personal Consumption Expenditure Index (PCE)—the preferred measure of the Federal Reserve Bank of overall inflation in consumer spending—is well below 2%.
And the Fed would like to see the PCE in the mid-2% level on a sustained basis before any discussion of inflation is viable or necessary.
Core PCE—Source: Bureau of Economic Analysis & Bloomberg
So, the US has sustained GDP growth and low inflation—nirvana, right?
While this might be a cause for caution, there’s another economy with not only a similar history but one of even longer sustained growth with lower inflation—Australia.
Back in my banking days, I worked with sovereign bond markets with a particular focus on fiscal reforming nations and central banks.
This included New Zealand, Ireland, Denmark and others, including Australia.
Australian GDP—Source: Australian Bureau of Statistics & Bloomberg
Australia during the 1980s was a boom and bust economy with erratic expansions and recessions.
Inflation was all over the place, soaring into the double-digits, and the Reserve Bank of Australia (RBA) did little to manage these swings.
Reforms came through deregulation of the financial markets, floatation of the Australian dollar and a directive that the RBA focus policy to target inflation between 2%-3%.
This along with other fiscal reforms led to stability and predictability for businesses, consumers and investors.
Sustained lower inflation, lower bond yields and investments in the resource markets has sustained the economy, resulting in GDP growth in positive territory since 1992, making it one of the longest positive-performing economies in the world.
This has resulted in the local ASX Stock Index returning nearly 1,200% from 1992 to date.
The overall Australian bond market has returned close to 240% since 1998 to date with the sovereign government bond market faring even better from 1992-1998, when I was highly active in the market.
It’s this kind of experience from my years in international finance that allows me to find and exploit the best market opportunities for subscribers of my Profitable Investing service.
The Australian stock market has been faring well over the past five years, with a return including dividends running at 69.3%. And while the wildfires in the south continue to be devastating, the market has been resilient.
S&P/ASX 200 Index Total Return—Source: Bloomberg
The Australian bond market also has been delivering healthy returns for the same trailing five years running at a total return of 23.6%.
Bloomberg Barclays Australian Government Bond Total Return Index—Source: Bloomberg & Barclays
One of the indexed ways to synthetically invest in the Australian markets is the iShares MSCI Australia ETF (EWA).
The ETF targets investments in the equity market with some cash and government bonds in the Australian markets.
It has generated a total return over the trailing year of 19.5%, which is a bit behind the S&P 500 Index in the US, but a very solid showing given the slowdown in its core trading partner—China.
iShares MSCI Australia ETF Total Return—Source: Bloomberg
The iShares ETF has a good dividend distribution that currently yields 4%. That’s well above the S&P 500 Index’s average yield of 1.8%.
Over the trailing three years, the actual cash distributions have been rising on average by 3.3% per year.
The takeaway from Australia is that a central bank more focused on inflation with backup from regulatory reforms and fiscal improvements brings sustained economic gains, lower inflation and investment inflows.
And with a US Federal Reserve that is now more focused on inflation targeting and US business and financial regulatory reforms, the US may well continue with further sustained growth and the resulting stock and bond beneficiaries.
My Profitable Investing subscribers are always the first to hear about the stocks and bonds that are benefiting the most from changes in inflation, regulatory and business conditions. Sign up today to get my next recommendation for further growth and income.
All My Best,
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life
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