Stocks Sizzle Down Under

Aside from mining stocks, what else do you like?

Besides BHP and Rio Tinto, we have large holdings in QBE Insurance, Leighton Holdings, Fosters Group and Telecom New Zealand (NZT Quote). QBE is a diversified general insurer with global operations. QBE has strong management and continues to benefit from the positive environment for general insurers. Leighton is an engineering and construction company with a large contract mining division and engineering operations throughout Asia. Fosters is Australia's largest beer and wine company, with a strong position in the Australian beer market and the potential to grow strongly in the wine industry. Telecom New Zealand is New Zealand's largest telecom company, operating in a duopoly situation in the domestic market with strong cash flows and a high return on equity.

How is the weak U.S. dollar affecting Australian companies and the Australian economy?

The weak U.S. dollar has translated into a strong Australian dollar. This has had a mixed impact on Australian companies, generally being negative for exporters and positive for importers. Therefore, retailers importing from Asia have benefited from lower costs, while exporters have had lower export prices. High commodity prices have offset the higher Aussie dollar for mining companies, while other industries have not been so lucky.

Australia/New Zealand bonds have also become very popular in the U.S. because of their stable currency and strong economy. Is this popularity in America deserved? What are your forecasts for Australian interest rates?

The Australian economy is currently in its 14th consecutive year of expansion, with annual GDP growth averaging a healthy 3.7% over this period. Thanks to extensive microeconomic reforms in the 1980s and 1990s, a flexible currency and a highly credible central bank, Australia's growth performance in the past two decades has been significantly more stable than in the 1960s and '70s. The credibility of the central bank and, more specifically, its success in implementing a formal inflation target have been particularly important.

The Reserve Bank of Australia first indicated an informal objective for inflation in 1993, and formalized this into the current target of "keeping underlying inflation between 2% and 3%, on average, over the cycle" in 1996. The annual pace of core inflation has averaged 2.4% over the past decade, right in the middle of the RBA's target range.