A Down Under Overview: Australia, New Zealand Feel Asia's Pain

Author:
Publish date:

SYDNEY -- It's tough being a Western economy in Asia right now: Just ask Australia and New Zealand.

Despite healthy economies, solid banking systems and little of Asia's corrosive crony capitalism, both countries are feeling the heat of Asia's meltdown.

Australia, which sends 60% of its exports to Asia, is clearly vulnerable. Toss in weak commodity prices -- most notably for gold -- and continued downward pressure is likely on the Australian dollar, wiping out any attractive near-term return from Australian equities for U.S. dollar-based investors.

That said, Australia has undeniable macroeconomic strengths: low inflation, a disappearing budget deficit, major tax reform on the agenda and economic growth forecast at 3.7% for the current fiscal year -- one of the highest in the

OECD

. As for the banking sector, the biggest complaint is high fees charged consumers -- hardly the stuff insolvency is made of. But with gold prices and the Australian dollar both trading near multiyear lows, it takes a tough stomach to invest here right now. Many see the Aussie dollar headed below 60 U.S. cents by year-end, marking a roughly 27% fall from just a year ago.

On Tuesday, the Aussie dollar stood at 65.59 U.S. cents. As for gold, who dares pick a bottom?

With most base metals prices also weak, the hard luck story Down Under has been amply reflected in the

Australian Stock Exchange's

All Mining and All Resources indices, both of which are down strongly this year.

However, brave bargain hunters willing to bet on stable or firming metals prices could enjoy substantial leverage if equity, commodity and currency prices here all rebound in synch -- which is far from a sure bet. For this kind of play, the best plan might be to stick with low-cost, financially strong producers such as

Rio Tinto

(RIO:Australia) and

Normandy Mining

(NDY:Australia).

Indeed, one maverick view circulating here is that Asia's economic difficulties might raise demand for Australian commodity exports in the coming year -- boosting earnings of producers. Think of it this way: With devalued currencies, Asian manufacturers may experience higher international demand for their manufactured goods. Since those goods must be made of something, it'll mean increased demand for Australian exports such as gold, aluminum, copper, zinc and iron ore.

Elsewhere in Australia, the big buzz in the broader market recently has come from partially privatized communications carrier

Telstra

(

(TLS) - Get Report

TLS ADR). It's up nearly 50% since being floated Nov. 17.

The former monopoly is aggressively moving into new markets such as electronic commerce, electricity distribution and even Internet content -- all the while retaining a temporary lock on the local telephone call market in Australia's newly deregulated telecommunications market.

While many analysts think the company may be getting ahead of itself, Telstra is a deregulated company in a fast-growing industry in a developing region. Could be good.

Across the Tasman Sea, New Zealand also has low inflation, government surpluses looming, and few of the financial sector excesses of Asia's economies. But the kiwi dollar also has taken a beating due to Asia's problems, mostly on worries that New Zealand's current account deficit will balloon as even weaker Asian currencies cause a flood of imports into the country.

Last week, Asian worries caused the

Reserve Bank of New Zealand

to peel back its estimate of economic growth in 1999 and 2000 to 3.0% and 3.9% from 3.8% and 4.3%, respectively. Central bank governor Don Brash -- a maximum pessimist on Asia -- thinks that more negative sleepers may lie ahead. However, he's hinted that disinflationary pressure on the New Zealand economy caused by Asia's problems could lead the RBNZ to ease domestic monetary policy, which would be good news for interest-rate-sensitive issues.

As for the broader economy, investors are likely to remain tentative over worries about the current account, which could rise as high as 7.7% of GDP for the year ending in March and remain over 6% of GDP until 2000.

What's more, the coalition government of newly installed National Party Prime Minister Jenny Shipley could be unstable as she shares power with populist New Zealand First Party leader Winston Peters. Many believe this cohabitation will lead to new elections before long.

Against this backdrop, near-term gains on New Zealand stocks could be limited. But compared to markets elsewhere in Asia, New Zealand's problems don't seem that big.

Stewart Taggart is a financial and technology journalist based in Sydney.