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Here’s why these 3 growth stocks are on my watchlist now

Economics 101 says that countries should specialise in producing products and services in which they possess a comparative advantage. For Australia that creates all sorts of never-ending ideological and political arguments, but for investors the path is a little simpler.

Australia has a natural comparative advantage in land and resources. Our strongest advantage is arguably in agriculture but we also have reasonable advantages in mining and energy. Further afield we also have weaker advantages in tourism and education.

One of the earliest comparative advantages identified for Australia was wool – which led to decades of economic prosperity as “Australia rode on the sheep’s back”. More recently our nation’s comparative advantage in bulk commodities such as iron ore has been exploited and harnessed.

Comparative advantages like the profitability of businesses in a capitalist society come and go. This means it’s necessary to look to the future and consider what comparative advantages we will possess tomorrow rather than yesterday.

Given our proximity to Asia and the growth in living standards across Asia, two industries which look set to exploit their comparative advantage are energy and agriculture.

Here are three stocks that look set capitalise on Asia’s demand for energy and high protein food and are now on my watchlist.

Santos Ltd (ASX: STO) is a $14 billion giant of the Australian oil and gas industry. The firm’s investment in LNG projects which are underwritten by supply contracts into Asia offers investors’ long-term revenue exposure to Asia’s growing energy demands.

Bega Cheese Ltd (ASX: BGA) is the largest listed Australian-based dairy manufacturer. The $740 million company owns the Tatura business which is a major exporter of infant formula and other longer-life dairy products into the Asian market. As per capita income throughout Asia rises, companies such as Bega look set to cash-in on the “Asian food bowl” theme.

Australian Agricultural Company Ltd (ASX: ACC) owns 7 million hectares of land spread over Queensland and the Northern Territory. When it comes to comparative advantages, they don’t come much bigger than that! Indeed there are few places in the world where one company could own that much land except Australia. In turn this allows AACo to operate an enormous beef cattle herd. The soon to be opened Darwin abattoir will create a vertically integrated, value-added export business positioned on the doorstep of Asia. While that doesn’t guarantee profits for shareholders it certainly has appealing prospects.

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Returns as of 6th October 2020

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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