A day after one strategist issued a less-than-enthusiastic
call on Australian stocks, new research indicates there are still
some reasons to be bullish on equities down under.
High interest rates relative to other developed market
economies, a strong currency and an AAA sovereign credit rating
are among the factors that have fueled inflows to Australian
stocks, bonds and the country's dollar. Those factors may also be
among the reasons that some market participants view Australian
equities as richly valued, but those frothy valuations could be
"Looking at historical valuations of Australian equities, we
conclude that Australian equities are currently selling at
relatively low valuations based on historical ranges," said
WisdomTree research analyst Chris Gannatti in a new research
That view stands to contrast to what iShares Global Chief
Investment Strategist Russ Koesterich said in a note Monday when
he downgraded his view on
Australia to Underweight from Neutral
"Australia's sluggish growth outlook is problematic given that
local equities are expensive compared to those of other developed
. "While most market watchers have been focused on the United
States rally lately, Australia has actually done better over the
last 12 months. Since March 2012, Australian equities have
climbed roughly 16% in dollar terms, outpacing most developed
markets, including the United States."
have been impressive performers over the past year. Heading into
the start of trading Tuesday, the iShares MSCI Australia Index
) is up 16.2 percent in the past year while the WisdomTree
Australia Dividend Fund (NYSE:
) is higher by 16.4 percent over the same time.
Gannatti notes that Australian stocks could continue to rise
because they are coming off a so-called high dividend year. As of
February 28, the trailing 12-month dividend yield on the MSCI
Australia Index was four percent "while the median value for all
42 available year-end values for the MSCI Australia Index is
3.71%," according to Gannatti.
Values above that number are considered high dividend years
and below are viewed as low dividend years. That bodes well for
further potential upside for AUSE and EWA.
"The average return for High Dividend Yield Years was more
than 17% better than the average for Low Dividend Yield years,
and nearly 9% better than the average of all 42 available
. "Of course, there is no guarantee that this result will repeat
itself, but we believe it worth mentioning, especially since it
is based on more than four decades of return history."
As of March 28, EWA had a trailing 12-month yield of just over
five percent while AUSE has a distribution yield of just over six
percent. There are significant differences between the two ETFs
investors should be aware.
For example, EWA is weighted by market capitalization and
allocates over half its weight to financial services firms.
Materials are next at nearly 19 percent. On the other hand, the
WisdomTree Australia Dividend Index "weights the 10 largest
qualifying companies from each of the industry sectors on the
basis of their dividend yields, resulting in a combined weight to
the Financials and Materials sectors of less than 35%," said
Actually, AUSE's current combined weight to financials and
materials is below 34 percent. In addition to financials,
consumer discretionary, industrials and staples also receive
double-digit allocations within the ETF.
AUSE's lower exposure to materials names could prove important
at a time when the stronger Aussie dollar is seen crimping
profits for Australia's miners. Additionally, the Reserve Bank of
Australia has said it expects the country's mining boom to peak
this year and after voraciously cutting interest rates from late
2011 through late 2012, RBA appears content to stand pat. Even
with those interest rate cuts, the Aussie has been one of the
top-performing developed market currencies in the world.
For more on Australia ETFs, click
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