As Australia's S&P/ASX 200 index has surged 16 percent
over the past 12 months, equity-based
tracking the worlds 12th-largest economy have predictably
The iShares MSCI Australia Index Fund (NYSE:
), the largest ETF tracking the country, is up about 14 percent
in the past year while the WisdomTree Australia Dividend ETF
) is more than 16 percent.
The IndexIQ Australia Small-Cap ETF (NYSE:
) has started to impress recently, surging 11.3 percent in the
past 90 days. That all sounds good, but as iShares Global Chief
Investment Strategist Russ Koesterich notes, there are some
causes for concern down under.
a recent note
, Koesterich reiterated his near-term neutral view of Australian
equities, but added he is "closely watching the market for a
One reason Koesterich gives for possibly downgrading Australia
is frothy valuations. EWA currently sports a P/E ratio of 18.7
and a price-to-book ratio of 2.61,
according to iShares data
"Australian equities are trading for nearly 2x book value.
While this represents a discount to US stocks, Australia is now
trading at a premium to most developed markets," said
The iShares MSCI German Index Fund (NYSE:
), iShares MSCI Singapore Index Fund (NYSE:
) and the iShares MSCI Japan Index Fund (NYSE:
) all have lower price-to-book ratios than EWA.
While the financial services sector accounts for over 48
percent of EWA's weight, that ETF is heavily exposed the
materials sector with an allocation of almost 22 percent. Mining
giants BHP Billiton (NYSE:
) and Rio Tinto (NYSE:
) are both among the ETF's top-10 holdings. Australia's status as
a major raw materials exporter not only exposes investors to
commodities prices, but to currency fluctuations as well.
On that note, the
Australian dollar has been persistently strong
against its U.S. rival
, providing headwinds for Australian exporters.
However, a willingness by the central bank there to pare
interest rates has not stemmed the tide of the rising Aussie and
the outlook for Australian monetary policy could be seen as
complicated in the near-term.
"Australian monetary policy has become complicated by the fact
that the country's mining sector is growing at a very different
rate than the rest of the economy," said Koesterich. "After an
aggressive round of rate cuts, the RBA is now taking a pause to
determine if its recent policy easing will be sufficient to
ensure a pickup in the non-mining sector."
Mining sector issues imply the Australian economy needs some
help from other industry groups, something it has yet to receive
in earnest. Should that scenario come to fruition, investors
should give AUSE a look because that ETF devotes about a third of
its weight to consumer-related stocks.
Overall, Koesterich holds a favorable view of Australia for
the patient investor, citing the country's "exceptionally low
debt burden, a budget close to balanced, a profitable corporate
sector and a sustainable pension system."
However, lofty valuations, sluggish mining sector growth and
consumer debt burdens are issues that could hamper Australian
stocks and the corresponding ETFs in the short-term.
For more on Australia, click
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