Tight Australian budget revives outlook of shaken investors
Just last spring, you could almost hear the cry of kookaburras reverberating down Wall Street. Australian stocks and bonds were all the rage. Investors rushed into the First Australian Prime Income Fund when it debuted in April. Instead of the original $75 million public offering, the fund took in $850 million. The appeal: Australian bonds yielding 12 to 14 percent. The risk: currency collapse.
At the time, the Australian dollar was strengthening. If it did slip, most analysts said, it surely wouldn't drop faster than the plunging United States dollar.
In March, a Salomon Brothers report touting Australian bank stocks said that ``the Australian dollar -- after declining by 27 percent in 1985 against a basket of Australia's principal trading partners' currencies -- will remain relatively stable in 1986.''
That report now resides in the Famous Last Words file.
The Australian dollar has slipped as much as 25 percent against the US dollar this year and twice that much against the yen. Japanese and US investors have taken it on the chin.
As of July 31 (latest numbers available), the First Australia Prime Income Fund had lost 17.09 percent of its value, according to Lipper Analytical Services. First Australia Fund had tumbled 6.95 percent in the 12 months ending July 31. By comparison, the 15 other closed-end mutual funds tracked by Lipper -- including South Korean, Japanese, Canadian, German, and French funds -- turned in an average gain of 21.33 percent over the same period.
What happened? Currency traders turned skittish when the economy weakened. Australian Treasurer Paul Keating exacerbated the fall by warning that the country was in danger of becoming a ``banana republic.'' Panic selling of Aussie bonds by foreign investors didn't help, either.
But now the Australian dollar appears to have bottomed. Stock prices are firming. In fact, some analysts say, this may be the opportune time to buy Australian securities.
The change has been largely brought about by last month's unveiling of the most austere government budget in 30 years. Taxes are being raised, wages lowered, the deficit pared from US$3.5 billion to $2.1 billion, and government spending slashed. The plan also calls for a reduction in federal bond financing. The last measure alone could shore up demand for bonds, bringing interest rates down.
Indeed, ``The bond market is moving back up. Now is the time for Australian equities,'' says Paul Koerner, an ardent bull who is editor of Worldwide Investment Notes, a St. Louis-based newsletter. He's not a big fan of single-country funds, but he figures the Australian funds will benefit as the market moves to record highs. Both funds have moved off their recent lows.
Mr. Koerner's optimism is based on the assumption that investors are (and will be) abandoning mining stocks in crisis-ridden South Africa and prospecting for similar issues in Australia. Mineral commodity prices are rebounding too, he says.
In fact, speculators have pumped up gold and platinum prices to their highest levels since 1981 (see story page 21). Koerner allows that the Australian economy is only in ``fair shape,'' but companies mining strategic and industrial metals are now ``very attractively priced,'' he says.
``Australia is the quintessential mineral market,'' agrees Gavin Dobson, ``but the only reason you'd want to pile into Australia is if you think inflation is coming back.'' And that's still unlikely, says the manager of Kemper-Murray Johnstone International Fund, which posted a strong 79.6 percent gain from June 30, 1985, to June 30, 1986.
``We see better, safer -- less risky -- opportunities elsewhere in the world,'' Mr. Dobson says. In Tokyo, for instance, the Nikkei stock average has been breaking all kinds of records in recent weeks.
Early in the year, Dobson did buy Australian bonds for his fund. They gained 32 percent, but the currency slide ate up all but 9 percent of the profits before he sold out in May and June.
Now, he says, ``I wouldn't be averse to putting 5 to 10 percent of a bond fund in Australia, because the yields [around 14 percent] could compensate for the currency downside.''
But he warns that even though the Australian dollar has stabilized, ``there's nothing in the book that says it can't fall further.''