Australia Helped by Rate Increase as Stocks Advance

Australia Helped by Rate Increase as Stocks Advance (Update3)

By Eric Martin

Oct. 7 (Bloomberg) -- Mining companies and brewers are benefiting from an Australian economy that is growing so fast the central bank suddenly raised interest rates, buoying the currency and giving global investors another reason to favor Down Under among the world’s hottest markets.

Huntington Asset Advisers’ Madelynn Matlock bought shares of Foster’s Group Ltd., the nation’s largest beermaker, on speculation consumer spending will increase. Scott Davidson of Absolute Asia Asset Management Ltd. said his company may add to holdings such as BHP Billiton Ltd. and Rio Tinto Group as metals rise. Money managers say the S&P/ASX 200 Index is poised to extend gains as it heads for the steepest annual return since 1993, beating equity gauges for the U.S. and world.

“If you bought stocks that you thought were exposed to economic growth, you can feel more confident that you made the right decision,” said Matlock, manager of the International Equity Fund at Huntington, which oversees $15 billion. “What the Australian central bank is tacitly saying is we’re pretty confident our economy is on firm-enough footing to withstand an increase in rates.”

Australia raised its benchmark rate yesterday, becoming the first country in the so-called Group of 20 nations to boost borrowing costs since the start of the credit crisis, after it avoided a recession and Reserve Bank Governor Glenn Stevens said the “risk of serious economic contraction” had passed. Gross domestic product will rise 0.7 percent this year, bucking the 3.4 percent slide for advanced economies, the International Monetary Fund said last week.

Stocks, Dollar

The S&P/ASX 200 climbed 2.3 percent to 4,695.70 at the close of trading in Sydney today. The gauge added 0.4 percent yesterday and the local currency jumped to the highest level in 14 months after Stevens increased the overnight cash rate target to 3.25 percent from 3 percent. Only one of 20 economists surveyed by Bloomberg News forecast the move.

Signs the worldwide recession is easing have helped push the Australian measure up 26 percent this year, exceeding gains of 22 percent in the MSCI World Index and 17 percent in the Standard & Poor’s 500 Index. The S&P/ASX 200 plunged as much as 54 percent to last year’s low from a record 6,828.7 on Nov. 1, 2007, mirroring declines that erased $37 trillion from global equity markets.

Stevens said the nation is likely to expand “close to trend over the year ahead,” and inflation will remain near the bank’s target range of between 2 percent and 3 percent. He cut the benchmark rate by a record 4.25 percentage points between September 2008 and April to cushion Australia against fallout from the global credit squeeze.

Currency Gains

The Australian dollar rose to 89.38 U.S. cents as of 7:06 p.m. in Sydney from 87.62 cents just before the decision was announced. The two-year government bond yield gained 3 basis points to 4.41 percent. A basis point is 0.01 percentage point.

Matlock, based in Cincinnati, said stocks dependent on consumer spending were cheap after A$20 billion in government handouts to households helped fuel a 1 percent expansion in Australia’s GDP in the first half of this year. The S&P/ASX 200 Consumer Discretionary Index traded for 4.7 times annual earnings last November, the lowest since at least 2001, according to data compiled by Bloomberg.

Matlock, who declined to discuss specific holdings, owns shares of Foster’s, according to Bloomberg data. The brewer climbed 12 percent from a nine-month low in April after turning profitable in the six months ended in June thanks to higher sales of new beers such as Pure Blonde.

Too Cheap

“We felt there was going to be growth in the economy based on consumer activity, and the market was discounting something less than what we’re likely to see,” Matlock said.

Davidson, director of research at Absolute Asia, said his firm owns BHP and Rio Tinto, which climbed 24 percent and 103 percent this year, respectively, as copper prices about doubled. Davidson’s company is considering investing more money in Australia, he said in a telephone interview.

“Domestic economic conditions are favorable, and we’re also encouraged about the outlook for commodities,” said Davidson, whose firm manages more than $800 million as director of research at Absolute Asia in Singapore.

Computer-related stocks and financial companies have gained the most on the Australian Stock Exchange this year, climbing 45 percent and 36 percent, respectively. Melbourne-based consultant SMS Management & Technology Ltd. added 199 percent, including a 7.8 percent advance on Aug. 19 after Credit Suisse Group AG raised the stock to “neutral” from “underperform.”

Financial Index

Six of the 10 best-performing shares in the S&P/ASX 200 Financial Index are property-related firms, including Rhodes, New South Wales-based Australand Property Group, a developer of residential land. Macquarie Group Ltd., the Sydney-based investment bank that lost 62 percent last year, has rebounded 95 percent in 2009 for the financial index’s eighth-best advance.

In contrast with the U.S. and euro region, property values in Australia have climbed this year. House prices increased 7.9 percent in the first eight months of 2009, RP Data-Rismark, a property-monitoring company, reported Sept. 30.

The economy is forecast to post just one quarter of contraction since more than $1.6 trillion of global credit losses spurred the first simultaneous recessions in the U.S., Europe and Japan since World War II. After shrinking 0.6 percent in the third quarter, Australia will grow 2.3 percent next year and 3.5 percent in 2011, economists’ estimates compiled by Bloomberg show.

The central bank may have acted too soon because the world economy is still in a recession, according to Prasad Patkar, a fund manager at Platypus Asset Management. Higher interest rates may stymie the recovery, he said.

‘Too Early’

“There’s a risk that they’ve gone too early,” said Patkar, who helps manage $1.2 billion at Platypus in Sydney. “The Australian economy has done quite well compared with what was expected of it, but the risk is potentially from a much weaker than expected global economy.”

Stevens said yesterday that future rate increases will be done “gradually.” A report tomorrow will show the unemployment rate rose to 6 percent last month from 5.8 percent, according to the median estimate in a Bloomberg News survey.

The Reserve Bank scrapped its forecast in August for the economy to contract this year, instead predicting GDP will jump 0.5 percent. The bank expects growth will accelerate to 2.25 percent in 2010 and 3.75 percent in 2011.

“What probably surprised people was the optimism on the outlook for the economy,” said Michael Kerley, director of pan- Asian equities at Henderson Global Investors Ltd., which oversees about $3 billion in the Asia-Pacific region, in a phone interview. “If that proves right, the domestic story in Asia looks pretty solid.”

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.

Last Updated: October 7, 2009 04:16 EDT