With the outlook for the Aussie economy being uncertain, many investors are understandably seeking out stocks that have considerable exposure outside the domestic economy. After all, it makes sense to diversify at the best of times and especially so with the future being full of potential challenges. Additionally, with the Aussie dollar weakening significantly in recent months, foreign earnings should gain a boost from translation improvements, too.
However, the domestic economy still has huge potential to grow. The RBA is intent on doing all it can to help it to do so, with interest rate cuts this year possibly being the first of more to come in 2015. And, while a rate of 2% may seem low, a glance at other developed nations shows that the RBA still has significant scope to become increasingly dovish over the medium term.
As a result, stocks such as Commonwealth Bank of Australia (ASX: CBA) and real estate company, Goodman Group (ASX: GMG), appear to be worth consideration by investors. Certainly, neither have performed well in recent weeks, with them being down 5% (CBA) and 1.5% (Goodman) in the last month. However, they both have impressive growth prospects that could improve investor sentiment over the medium term.
For example, Goodman is expected to increase its bottom line by 9.4% in the current year and, despite this, it trades on a price to earnings (P/E) ratio of 17.2. While higher than the ASX's P/E ratio of 15.4, Goodman Group's price to earnings growth (PEG) ratio of 1.8 holds significant appeal – especially when you consider that the company's cash flow has risen at an annualised rate of 16.1% during the last five years.
Furthermore, while 43% of its total asset base is located in Australia, Goodman has a wide spread in terms of its geography. For example, it has assets in the US, UK, Europe and Brazil, as well as across Asia. This means that it should benefit from lower interest rates as a result of a boost in earnings and also the prospect of rising property rises in the domestic market. Additionally, Goodman has a sound balance sheet and is able to take advantage of any weakness in asset prices to buy high quality assets at discounted prices.
Meanwhile, CBA also has a bright future despite having to raise $5bn in new capital to satisfy new regulatory rules on financial ratios. Its bottom line is forecast to rise at an annualised rate of almost 6% during the next two years and, even though it is in the process of strengthening its financial position, CBA should still beat inflation when it comes to dividend per share increases. That's because shareholder payouts are forecast to rise by 3.4% per annum during the next two years, which puts CBA on a forward yield of 5.5%.
Looking ahead, CBA may not offer dramatic rerating potential, with its P/E ratio of 15.2 being only slightly lower than that of the market. However, as its recent results showed, its profitability remains very strong (and at record highs) and its management team is optimistic about the long term prospects for the Aussie economy. This, combined with its excellent yield, means that now seems to be a good time to buy a slice of it.
