A bulk carrier is being loaded with iron ore from a Rio Tinto mine in West Australia's Pilbara region.HO
Australia isn't just a two-speed economy, with a booming West and a struggling East. It is also a two-speed stock market, with commodity producers hogging most of the gains, while other sectors look for direction.
This year is a case in point. Australia's benchmark S&P/ASX 200 index has been a global laggard in 2010, slumping 3.6 per cent even as most of the rest of the world's major indexes show gains (the S&P 500 has risen about 9 per cent; Canada's S&P/TSX composite index has risen about 12 per cent).
You can see why: Australian financials, which have the biggest weighting within the index, have fallen nearly 10 per cent. Elsewhere within the index, industrials have fallen 6 per cent and consumer staples have fallen 2 per cent.
But materials - a large group of more than 40 stocks, including behemoths like BHP Billiton Ltd. and Rio Tinto Ltd. - stand out as a notable exception among the 10 subindexes, rising nearly 8 per cent this year. This isn't a huge surprise, given the continuing appetite for base and precious metals these days, owing largely to Chinese demand.
Still, it means that investors who prefer to bet on big baskets of stocks - say, the iShares MSCI Australia index fund - have a tough hurdle to overcome. How do you make money with your investment when the stock market's winners are being dragged down by a larger, heftier group of laggards?
This isn't a knock against index investing, which is generally a fine idea. It is simply the recognition that some indexes probably aren't worth betting on.
The better approach is to forget about Australia as a stock market and instead focus on some of its top names. The advantage of BHP Billiton and Rio Tinto is that both stocks trade as American Depositary Receipts on U.S. exchanges, making them easy for Canadian investors to trade.
Apart from convenience, these companies also give investors international exposure to aluminum, gold, nickel, copper and coal - making them ideal ways to play a global economic recovery and a continuing expansion in China. Both stocks are up double digits this year in New York, proving that a two-speed stock market is okay - as long as you pick the right one.