Australia’s Liberal-National Coalition (LNC) swept that country’s elections on September 7, winning 54 percent of the vote in parliamentary elections and taking 77 of that body’s 150 seats. That knocked the Labor Party, which had ruled for more than six years, out of power and propelled Tony Abbott into the Prime Minister’s office.

As you can see from the chart below, Survive Portfolio holding iShares MSCI Australia Index Fund (NYSE: EWA) was already in the middle of a rally thanks to strong economic data out of China.



China is Australia’s largest trading partner, with two-way trade valued at AUD608.2 billion in 2011. Minerals and fuels accounted for more than half of that value, making China the largest consumer of Australian commodities. China’s industrial output shot up 10.4 percent in August and power output put in its fourth month of gains, rising 4 percent sequentially and 13.4 percent year-over-year.

That’s a clear signal that Chinese demand for Australian commodities, a sector that has been hurt by sluggish global economic growth, should be on the ascendency.

The election results are providing an extra boost now, with the LNC perceived as being more business friendly than the formerly ruling Labor Party. Abbott and his coalition campaigned on the promise to repeal the country’s carbon tax and mineral resource rent tax (MRRT).

The carbon tax, which became effective July 2012, has been generally unpopular since it first came under discussion several years ago. It has been a political hot potato from day one, being partially responsible for the toppling of three prime ministers since 2009. Charged at AUD23 per ton of carbon dioxide emitted, the tax has been fiercely opposed by Australia’s industrial and mining sectors. So far, the tax doesn’t appear to have made a major dent in company earnings, but this matters little to businesspeople who loathe the tax not only on practical matters but on principle.

The MRRT is charged on profits generated from the exploitation of non-renewable resources in Australia and became effective at the same time as the carbon tax. It is supposed to be charged as 30 percent of taxable profit at Australian iron ore and coal firms, but few companies have been profitable enough for the tax to pose much of a headwind.

Still, both taxes are despised by management and their repeal is expected to go a long way towards shoring up Australian business confidence.

With 18.6 percent of the fund’s assets allocated to the materials sector and a further 5.9 percent devoted to energy companies, EWA is already catching a tailwind from the anticipated repeal.

But it isn’t a done deal yet, with the Liberal Nationals holding just 33 seats in the country’s 76-seat Senate. Labor holds 25 seats while the Greens have 10 and minor parties ended up with eight. While the LNC is expected to strike deals to cobble together enough votes to control the Senate and pass the repeal, such alliances can get messy.

But the end of the two taxes coupled with improving economic data out of China and a relatively weak Australian dollar should continue to propel EWA higher for at least the next few months.

That’s particularly true as the Reserve Bank of Australia (RBA) continues to hold the country’s benchmark interest rate at an all-time low of 2.5 percent. Mining companies have been holding off on investment thanks to weak demand and lingering questions about Australia’s political situation. If the tax repeal does become a reality, these companies will have easy access to cheap capital for a slow ramp up in production.

My original thesis for adding EWA to the Survive Portfolio remains intact, despite the political change. In fact, the turnover in government is a plus.

Australia’s materials and energy sectors will benefit from growing demand for raw materials—a trend that will likely be one of the root causes of coming inflation. With fewer fetters in the form of special taxes, profitability at those businesses will eventually be bolstered.

Australia is resource rich but it’s also a developed country, so we don’t have to worry about the political instability that is so often a concern in developing resource nations. Major inflationary bubbles also aren’t much of a concern, because historically the RBA has done a reasonably good job of staying ahead of Australian inflation in terms of monetary policy.

Continue buying iShares MSCI Australia Index Fund up to 30.

The shifting political winds in Australia are also benefiting the Thrive Portfolio’s position in iShares S&P Global Materials (NYSE: MXI).

Almost 10 percent of the fund’s assets are allocated to Australia but the real performance-driving country is the US, at 27.9 percent of assets. A steady if uneven economic recovery in the US is helping to propel the fund higher, as well as a rebound in Chinese industrial production and fixed investment.

Thanks to those factors and Europe’s expected emergence from its worst recession in memory, we look for commodity demand to continue to improve in the coming months, pushing the prices of most raw materials higher.

IShares S&P Global Materials also remains a buy up to its target price of 65.