Australian shares sank more than European stocks last year, but investors say they could be headed for a revival as interest rate cuts get consumers spending and a global economic recovery intensifies.

The benchmark S&P/ASX 200 completed the first consecutive annual decline in its 20-year history in 2011 as domestic and global headwinds shattered local investor confidence. Its near-15% slump to end the year at 4056.6 was greater than the 11% fall in the Stoxx Europe 600 Index, which was weighed down by that region's sovereign debt crisis. In the U.S., the S&P 500 was virtually unchanged.

"Australian stocks are looking very cheap right now," said Shane Oliver, head of investment strategy at AMP Capital Investors, who helps manage close to US$100 billion from Sydney. "The market should recover next year as it becomes clear the global economy isn't going into free fall, and as rate cuts in Australia reach a critical mass."

In addition to Europe's problems, Australian investors' faith in a global recovery was hurt by patchy U.S. economic data, several natural disasters, and tighter monetary policy in China, the destination for much of Australia's raw-materials exports.

At home, manufacturers were hit by a surging Australian dollar, while retailers and banks struggled as the country's interest rates, still among the highest in the developed world, crimped consumer spending.

In August, the S&P/ASX 200 entered what some investors call a bear market after Standard & Poor's cut the U.S. credit rating. That news rocked markets globally, although U.S. shares have held up on optimism an economic recovery there is intact.

While Australian shares may struggle early in 2012 as some of last year's issues continue to play out, the market should recover in the latter half as a global recovery is confirmed, investors say.

There are already signs growth is picking up--a survey Tuesday showed Australian manufacturing expanding for the first time in six months, while earlier German and Chinese factory output reports beat economists' estimates.

On the Sydney bourse, BHP Billiton Ltd. (BHP) and Rio Tinto PLC (RIO) tumbled 24% and 29% in 2011, respectively, on concerns commodities demand will wane as austerity programs leave European nations cash-strapped. The mining giants also suffered from speculation China's anti-inflation policies may lead to a hard landing for its economy.

Australia's central bank in December cut interest rates for the second straight month citing concern over the fall-out from Europe's crisis, although worry about a Chinese slowdown lessened.

Australian manufacturers suffered last year as the dollar hovered near parity with the U.S. currency after a near-40% gain since 2008. BlueScope Steel Ltd. (BSL.AU) dropped 79%, while Cochlear Ltd. (COH.AU), which sells hearing implants overseas, lost almost a quarter of its value.

Companies with a heavy U.S. presence--including James Hardie Industries SE (JHX.AU) and Brambles Ltd. (BXB.AU)--were among the few to climb as that nation's economic prospects looked like improving in the June-December period.

While the order of declines was less than in the resources sector, financial shares--including Westpac Banking Corp. (WBC.AU) and National Australia Bank Ltd. (NAB.AU)--retreated as the nation's high interest rates encouraged people to save.

That had a knock-on effect on retailers such as JB Hi-Fi Ltd. (JBH.AU) and Billabong International Ltd. (BBG.AU)--both of which issued profit warnings recently. JB Hi-Fi lost 37% of its value in 2011, while Billabong shed close to 78%.

"Rather than progressive improvements in economic conditions, as most anticipated, we saw an intensification of the economic headwinds in 2011," says Angus Gluskie, managing director of White Funds Management in Sydney.

Still, last year's drop pales in comparison with the S&P/ASX 200 index's 41% decline in 2008 in the midst of the credit crisis. The benchmark gauge recovered 31% in 2009 as governments pumped money to stimulate their economies.

 
    -By Shani Raja, Dow Jones Newswires; +61-2-82724683; shani.raja@dowjones.com
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