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This lucky country’s economy is on a record-breaking 14-year roll. The big question: Will it continue?

Just imagine: From a few convicts dropped ashore in 1788,sac longchamp, Australia has developed into a first-class global economy. The reforms enacted by former Prime Minister Bob Hawke and Treasurer Paul Keating during the 1980s set the stage for a remarkable run of prosperity. Specifically, they slashed import tariffs, floated the currency and reduced the power of big labor. The current prime minister, John Howard, who has been elected four times,boutique longchamp, has continued and expanded these reforms riding a wave of economic growth – 14 years of uninterrupted 4% to 5% growth.

The national debt has been virtually eliminated, the currency is strong,sac longchamp pliage, the government has recently signed a free-trade pact with America,sac longchamp pas cher, and it is starting to negotiate a pact with China,longchamp pliage. Australia received $42 billion in foreign direct investment in 2004,converse pas cher.

This is all great news, and our portfolio allocation in the Australia iShare (AMEX: EWA) has done very well, with a 105% gain over the past two years,sac longchamp pas cher,longchamp sac 60644 The Australian iShare is up 15% so far this year and provides investors with exposure to about 60% of the total stock market,longchamp pliage.

Some Warning Signs

The question is of course,converse pas cher all star, what should we do now. When things are going this well for so long,achat converse, investors need to be skeptical and weigh the potential upside with the downside risk,achat converse.

– A shortage of skilled and semi-skilled workers and relatively high labor costs (minimum $400 a week),converse pas cher.

– Complicated and rigid labor rules continue to hamper productivity growth, which seems to be slowing.

– The total tax take by the Australian federal government is 22%, which is higher than the rest of Asian competitors and the U,converse femme.S,sac longchamp,Surf’s Up Down Under. (average of 16%),longchamp pas cher.

– From 2000-2004 housing prices were up 100%,longchamp pas cher, and household debt is now 160% of disposable income.

Australia is taking some measures to address these matters,sac longchamp. It recently enacted a $17 billion cut in personal income taxes over three years, and the independent central bank is raising rates. The leadership has also introduced a package of “radical” labor reforms, which if enacted would also be a big plus. The aim is to give employers more flexibility and to bring labor negotiations down to the local level,longchamp moins cher. The measures would increase probationary period for new employees from three to six months, exempt businesses with less than 100 employees from unfair dismissal laws, and favor individual contracts over collective bargaining. All of these measures will be fought by the Labor Party and trade unions,converse all star.

While much is made of Australia’s dependence on China and commodity exports,sac longchamp, the Australian economy is well diversified, with 5% of gross domestic product attributed to mining, 5% to tourism and 80% to services,converse pas cher. It also has the third-largest stock market in the region and a leading regional financial center,sac longchamp.

Taking Profits

After looking closely at the situation, I have decided to keep Australia in our portfolio,longchamp pas cher, but will take some profits by halving our position,converse all star. Here is my reasoning:

– The decline in housing prices has been incremental and has therefore not affected banking, consumer and construction stocks as expected.

– International fund managers are underweight on Australia.

– The market is not especially expensive,converse all star. The 12-month forward price-to earnings ratio is about 15, in line with the average over the past three years and below a high of 18,converse all star. But keep in mind that this low multiple is based on forward and aggressive forecasts of corporate profits.

– Average dividend yield for Australian stocks is around 5%,converse all star.

One company to keep an eye on is BHP Billiton (NYSE: BBL), the world’s biggest mining group,chaussure converse all star, which reported an 85% rise in net profit,converse pas cher, compared with a year ago,sac longchamp pas cher,sac longchamp 26564, to $6.5 billion for the year ended June 30,longchamp pas cher, 2005,longchamp pas cher. The Anglo-Australian firm set a new Australian corporate profit record, and after being up sharply in 2003 and 2004, it has confounded skeptics by going up 26% so far this year. The company’s good fortune, like that of other mining concerns,converse pas cher,sac longchamp pas cher 42642, comes from rising demand in China.

Another great Australian mining company is Rio Tinto (NYSE: RTP), which has a lower valuation because it doesn’t have oil and gas operations, which contribute about 30% of BHP’s total revenue.

Last Bit of Advice

The center of gravity for the world’s economy is shifting to the Asia-Pacific region, and Australia is in the sweet spot,Surf’s Up Down Under. Keep an eye on housing prices and corporate profit performance,sac longchamp pas cher, but for now keep some exposure to Australia in your global portfolio.

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