Foreign investors flock back to Oz

AUSTRALIAN investors who send their money offshore to chase the hottest markets should really be looking closer to home. Indeed, the Australian Stock Exchange finds itself one of the best-performing markets in the world. Still near record highs, the 4% rise in the All Ordinaries index in the past year sounds modest but compares with a 24% slide in Germany's DAX, a 16% fall in Britain's FTSE 100, and a 10% slip in America's S&P 500.

The resurgence comes as Australia's booming economy grew four times more quickly than that of the US in the final three months of last year. The local market's resilience has caught some experts off guard. The Economist Intelligence Unit had predicted the main index to be around 3100 points by now, but it is already past 3400. Foreign portfolio investment turned negative in 2000, but has strengthened to the point that the Reserve Bank says it is back to 1999 and 1998 levels, when Australia was a haven from the Asian crisis.

As a traditionally defensive play, Australia is used to this status. After the tech wreck of 2000, and the terrorist attacks on the US on 11 September, the factors which usually make Sydney one of the world's least sexy markets suddenly became a virtue. Shunned because it was considered an unfashionable old-economy play with a high proportion of bank, retail and food stocks, the market trod water in 1999 as the tech bubble grew, but benefited when traditional industries came back into vogue two years ago.

Likewise, even Australia's admittedly small contribution to the war against the Taliban in Afghanistan could not deter fund managers switching out of Europe and the US after 11 September and parking some funds in Australia.

The increased number of dual listings, with Brambles-GKN and BHP Billiton recently joining Rio Tinto and News Corp, has given the big investment houses the chance to trade global firms in another time zone, boosting share trade volume. It is no surprise to see liquidity - the proportion of shares sold against shares on issue - topping 80% in February, compared with only 60% a year ago.

The big question is whether it can last. With the average price-earnings ratio around 20, against a long-term average of 15, some analysts see a bubble waiting to burst. With things looking up in the US, they say investors are more likely to pull money out of Australia to chase a recovery on Wall Street, or even Asian markets such as Korea. In the meantime, Sydney is making the most of it. The financial district is happier than for some time, with the foreign investment houses that hung on in the recent consolidation now reporting improved business.