(TM) Is It Too Early to Invest Down Under?

I’m currently aboard the luxury ship Crystal Symphony in the midst of The Oxford Club’s Chairman’s Circle Wealth Cruise from Sydney to Bali. (Hazardous duty, yes, but someone has to do it.) And while we are spending much of our time eating, drinking, gabbing and touring about, we are also here to size up global investment opportunities. (After all, some of us plan to write this trip off.)

Australia is a beautiful country filled with attractive people. The men on the trip have been admiring the women and the women on board seem to enjoy ogling the local men as well. It helps, of course, that obesity is not epidemic here. Australians are a lean, fit people. And who ever tires of hearing “G’day mate” or “No worries”?

Upon entering the city from the airport, an enormous cockatoo with a brilliant yellow crest flew in front of our cab. I thought perhaps someone’s pet had escaped. Then we turned the corner and a whole flock of them flew up in front of us. Beats the heck out of nasty grey pigeons, though Sydney seems to have its share of those too.

I’ve also been reminded of the little differences you notice whenever you’re traveling in the southern hemisphere.

At night, for instance, the constellations are different. You’re likely to see the Southern Cross instead of the Big Dipper. And it’s always a bit odd to discover that the weather gets warmer as you travel further north, as is happening now as we approach Cairns.

Our group kicked things off in Sydney with a Pre-Seminar at the Four Seasons. We heard from such luminaries as Bridgeworks Director Wayne Dyson, Byron Suchecki (manager and analyst at the Perth Mint) and Dan Denning, chief investment analyst and editor of The Denning Report, a high-level, macroeconomic survey specializing in Australian investment opportunities.

Dan gave us a neat summary of the pros and cons of investing in Australia right now. On the plus side, Australia is blessed with natural resources, including oil, natural gas, copper, lead, zinc and gold. As an additional plus, it happens to be situated a lot closer to China than Europe or North America. China – with its voracious appetite for raw materials – is a natural market for much of Australia’s natural bounty.

But there are negatives too. Members of our group were surprised to discover how expensive things are here. One afternoon, for instance, we ventured over to Manly Beach to watch the Australian Open Surfing Championship. Poking around the stores we found that men’s surf trunks sold for $200, T-shirts were $40, lunch was $80. Many of the women, eager to stimulate the local economy, bought nothing.

The Aussie dollar has plunged 17% from its peak in early 2013. Unfortunately, that’s not nearly enough.

Can’t Afford a Home

A local Australian expression is that something is “safe as houses.” But housing isn’t cheap here… or safe as an investment. (Australia avoided the recent housing bust that afflicted so much of the United States and Europe by following sound banking practices. In short, they required actual down payments.)

The average home in Sydney currently sells for $765,000. (Closer to $700,000 in U.S. dollars.) And my colleague Harry Dent made waves during our stay by forecasting that Sydney home prices are destined to fall 50%.

That forecast sounds a bit ambitious – though perfect for creating waves and grabbing local headlines – yet there is no denying that trouble lurks around the corner when the average family cannot come close to affording the average home.

On the basis of purchasing power parity, the Australian dollar needs to come down. After all, the currency was worth less than US$0.50 14 years ago.

It then rode the boom in commodity prices. Today, however, the Goldman Sachs Commodity Index is well off its highs. Yet the Australian dollar is still up nearly 80% from a decade ago. A currency adjustment would make the country much more attractive for exports and tourists.

Labor Strife

Australia also has a problem with its labor unions. Like so many unions elsewhere, they have a bad tendency to overplay their hand. In recent negotiations, for example, Toyota Motors (NYSE: TM) offered factory workers an 11% pay raise. The union held out for 12% and went on strike for three weeks. After the strike was settled, a third of the work force called in sick.

Toyota decided to call it quits. It is leaving Australia. In fact, the unions have driven out all of the major international manufacturers over the last few years. (Unfortunately for union members, their negotiators have a hard time calculating 12% of zero.)

In sum, I think it’s too early for any big commitment to Australian equities. Commodity prices are falling. China’s economy is slowing. The Aussie dollar is weak. Unions are noncompetitive and uncooperative. Real estate is expensive. And stocks here are no great bargain either.

On the bright side, we can now turn our attention to the country’s biggest attraction and the planet’s largest living organism: the Great Barrier Reef. Our group will be paddling around it tomorrow.

We will be having more seminars at sea as we steam toward Indonesia. Assuming we survive the reef and the free-pouring bartenders on board the Crystal, I’ll keep you posted.

Good investing,

Alex


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