Should yield chasers set their sights on Australia?

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Australia faces a double-whammy from record-low interest rates and commodity-price drops, but the selloff may have left its market surprisingly attractive to yield chasers.

"The economy overall in Australia is going to have a tough time," said Stuart Rae, chief investment officer for Pacific Basin equities at AllianceBernstein, citing a house growth forecast of less than 2 percent for this year. But in the firm's equity income portfolio, "we're very overweight Australia and we're comfortable sticking with that."

The downtrend in commodity prices has taken its toll on Australia's stock market. The , which has an around 22.6 percent weighting in basic materials and energy, eked out a 1.6 percent gain in 2014, but it's currently trading around 3.6 percent below its mid-2014 peak.

The relative underperformance has left it with an around 6 percent dividend yield, according to Reuters data, and that may be sustainable even if commodity prices fall further.

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"Historically, the resources companies haven't been the biggest dividend payers," Rae said. "It's things like banks and telcos that make a much bigger part of the dividend contribution. So, if BHP and Rio Tinto have to cut their dividends, it may not be as big an impact as you might think."

BHP and Rio Tinto have dividend yields around 6.6-6.7 percent, but banks Westpac, ANZ and NAB are running closer to 8 percent, Reuters data show.

It isn't even clear the big resources players will need to cut their dividends as they lighten up on capital expenditures to support cash flows, Rae said.

Aussie dollar impact

However, he noted AllianceBernstein's portfolio is hedging its Australian dollar exposure, calling further U.S. dollar strength "a reasonably sure thing."

The Australian dollar is currently fetching around $0.81, well off its peak around $1.10 in 2011, after dropping around 9 percent since the beginning of 2014.

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But a declining Aussie dollar isn't all bad for Australia's stock market, helping to boost the value of U.S. dollar-denominated earnings when they're translated back into the local currency.

"It is now providing a tailwind for the trade-exposed stocks in the market," analysts at CIMB said in a note last week.

But out-of-favor resources plays aren't seeing the effect, it said.

"The market has mostly looked through the positive impact of the weaker Australian dollar and instead focused on the declining U.S. dollar commodity prices," CIMB said, citing a lack of earnings forecast increases. "This creates a risk of consensus earnings upgrades over the next few months particularly if commodity prices stabilize."

For example, OZ Minerals likely receives a 346 percent reported earnings boost from the Australian dollars depreciation, CIMB estimates, but the stock has fallen around 45 percent over the past two years. The stock's dividend yield is around 5.6 percent, according to Reuters data.

Aussie bonds

Some also see value in Australia's government bonds, even as the Reserve Bank of Australia is generally expected to cut interest rates this year from the already record low 2.5 percent.

Things don't look terrible for Australia: Pro

While staying fairly neutral on higher quality government bond markets in general, Australia's bonds are likely to "significantly outperform" U.S. Treasurys, Daniel Ivascyn, global chief investment officer at bond giant Pimco, said at an event last week for DBS private banking clients, citing in part the RBA rate cut expectations. Bond prices move inversely to yields.

Australia's 10-year bond is yielding around 2.728 percent, compared with the 10-year U.S. Treasury at around 2.00 percent.

Ivascyn noted that Pimco is also hedging its Australian dollar exposure.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter