AS the rest of the developed world treads on thin ice, holding onto stimulative monetary policy for fear that their economies return to recession, or worse fall deeper into recession, one country has been going against the trend. Yesterday, Australia’s Reserve Bank announced that it will increase interest rates for the third time in three months, flashing its confidence that its economy will continue to expand.

Among advanced economies of the world, the island-continent rarely gets the recognition it deserves. Despite the strong prospects for its economy, which has remained stable in comparison to its peers, investors’ eyes have skimmed past Australia, often landing instead on either larger developed markets or emerging markets. However, Australia may be worth a second look.

Yesterday, Australia’s central bank announced that it boosted interest rates 25 basis points (0.25 per cent) to 3.75 per cent effective today. Compare this position to the US Federal Reserve (Fed), which opted to to keep interest rates at near-zero record lows after its most recent two-day monetary policy meeting which ended on November 4, 2009. The Fed is expected to hold interest rates at this level for an extended period in the face of high unemployment and low inflation.

Australia was one of only a few advanced economies that managed to avoid slipping into a recession last year. In fact, the “down under” economy has not been in recession since 1991 as rapidly-growing industry in China and India provided a new market for the resource-rich nation. However, the country did face its fair share of challenges despite being able to avoid official recession. Demand for its raw materials plunged as global economies turned downward, and as a result, in February the Australian government announced a US$26.5B stimulus plan in an effort to protect the economy from the worldwide recession. Australia’s economy grew 0.4 per cent and 0.6 per cent in the first and second quarters of 2009 respectively.

Last month, the Australia’s Central Bank raised its forecast for Gross Domestic Product (GDP) growth in 2009 to 1.75 per cent from 0.5 per cent and boosted its 2010 estimate to 3.25 per cent from 2.25 per cent. The International Monetary Fund (IMF) sees real GDP expanding 0.7 per cent in 2009 and two per cent next year.

This compares favourably with the United States, which the IMF expects to contract 2.7 per cent this year and grow 1.5 per cent in 2010. For the UK, which recently had its sixth consecutive quarter of decline in GDP, the IMF expects a decline of 4.4 per cent this year and growth of 0.9 per cent in 2010.

An option one may want to consider if investing in Australia is the iShares MSCI Australia Index Fund (NYSE: EWA), an exchange-traded fund (ETF) which tracks the performance of publicly traded stocks in the Australian market as gauged by the MSCI Australia Index. The ETF has nearly doubled in value (rising 92 per cent) to US$24.02 over the past 52-weeks.

This increase has been especially commendable when viewed against the backdrop of other developed-nation indices. Take for example, the Dow Jones Industrial Average (DJIA), which is a widely accepted yardstick for the performance of the US stock market. Over the past year, the Dow advanced only 28.69 per cent to 10,490.40 (December 1, 2009). London’s FTSE 100 Index hasn’t fared much better, the gauge for stock market performance in the United Kingdom has risen only 30.66 per cent to 5,312.17 (December 1, 2009 – close) over the past year.

Other opportunities lie in Companies with operations in Australia, like Rio Tinto Group PLC (NYSE: RTP). Shares of RTP have more than doubled to US$211.70 over the past year, but are still well-below levels seen in recent years.

Shari DaCosta is a Research Analyst at Stocks & Securities Ltd. You can contact her at sdacosta@sslinvest.com.