Investors May See Upside Down Under

BOSTON (TheStreet) -- Beyond the vegemite sandwiches and koala bears of Australia lie unique investment opportunities, according to Robert Scharar, fund manager of the Commonwealth Australia/New Zealand Fund (CNZLX). Last year the fund was ranked No. 1 by Lipper in assessing a 15-year period.

Australia and its neighbor, New Zealand, benefit not just from being commodity rich, but in being stable democracies that can handle the commodities responsibly, Scharar says, pointing to how Australia handled its global-headline-making parliamentary impasse in selecting a prime minister -- itself brought on by a controversial proposal for a 30% tax on coal and iron ore profits. The result: compromise that hasn't affected a growing role as energy giant.

In addition to being one of the first countries to emerge from the global financial crisis, Australia has mineral wealth and a proximity to China that is stoking strong economic expansion. An illustration of both strengths is found in the largest single company-to-company contract in its history, which calls for China National Offshore Oil to buy 3.6 million tons of liquefied natural gas per year for 20 years from Australia's BG Group.

Government officials are announcing boldly that massive undersea fields could quadruple Australia's exports, turning it into an energy superpower.

The Commonwealth fund is alone in focusing exclusively on both lower Pacific Rim countries. On Sept. 2, BlackRock ( BLK) announced the launch of the iShares MSCI New Zealand Investable Market Index Fund ( ENZ), the first ETF focused solely on the New Zealand market and a complement to the iShares MSCI Australia Index Fund ( EWA). In March, IndexIQ launched the IQ Australia Small Cap ETF ( KROO).

Scharar says his bullish attitude for Australia and New Zealand comes as much from on-the-ground observations as from any spreadsheet calculation. His frequent trips have enabled him to seek out a variety of small- and midcap companies poised for success. Overall, he sees the countries as safe havens amid the economic uncertainty still rooted in the U.S. and other nations.

"The economy is in this sort of push-pull between inflation and deflation, and I think Australia and New Zealand are particularly well-positioned to offer an investor some upside to all of that," he says.

The commodities market, and the demand for raw resources, is key for both countries.

Food demand will continue to rise, he says, and infrastructure projects will require steel, concrete and other natural resources. Energy resources will continue to be a longstanding and lucrative export.

"I think New Zealand will be in a position to benefit from increased food commodity prices fairly dramatically, just like Australia will from the increased prices for resources," he says. "Australians are also pretty smart about how they are doing that. They are not turning over their assets to everybody in the world. They are partnering up with people in ways that they can maintain control and transparency."

Scharar concedes that the housing market, particularly in Australia, could be a weakness.

"The market could certainly be deemed to be overpriced in terms of the relative valuation of housing," he says. "While I don't disagree that there is going to be some softness, I don't think it is going to drag everything else down. It won't be as painful as it was in the U.S."

Australia's still-evolving election outcome may prove beneficial for investors, Scharar says.

"The winner with the Australian Labor Party, Julia Gillard had to cobble together a majority by bringing in some people from the Green Party and some other independents," he says. "That's a pretty fragile arrangement and it may not last the three years you normally expect the government to be around. The good news is that it might stymie any kind of really momentous change."

"The Australians have a couple of key things they are dealing with right now," he explains. "One of those is resources. They want to put a new tax of 30% on coal and iron ore profits because they don't have all the infrastructure needed to deliver these products out of the country, and they will need new rail, new ports and a host of other things."

The initial proposal for that tax, on mining resources, "basically brought down the former prime minister," Scharar says.

"I think that while the Green Party prefers this original tax, because they really want to slow down mining, the middle will now ultimately prevail. What they will do now is come up with something that supports continued growth, but not be draconian in how it affects companies," Scharar says.

Another initiative, for national Internet access, has been largely a public project. Scharar expects the new coalition government to open that process more to private interests.

As for New Zealand, he describes it as "very business oriented" and "one of the most transparent nations in the world in terms of their financial information."

-- Written by Joe Mont in Boston.

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