Australia's GDP grew 0.8% sequentially in the second quarter of 2017 and 1.8% from the prior-year period. However, the IMF in its latest world economic outlook stated that it expects the Australian economy to expand a mere 2.2% this year compared with its April forecast of 3% (read: Australia's GDP Growth Misses Expectations: ETFs in Focus ).
The primary factors driving the downgrade were reduction in housing investment and mining exports due to bad weather in the first half of the year, the IMF said.
Retail sales declined 0.6% in August compared with a 0.2% decline in July, way below economists' expectations of a 0.3% increase. The weakness in retail sales clouds the government's expectations of a 3% growth.
In stark contrast to retail sales, a survey by National Australia Bank showed that Australian business conditions improved significantly in September. The index returned a reading of +14 in September compared with a long-term average of +5.
Australia's housing market is booming and the Reserve Bank of Australia (RBA) kept rates unchanged at 1.5% in its October Monetary Policy Committee meeting for the 14th straight month. Rising debt concerns have been bothering the RBA. Moreover, owing to regulatory burden, major players in the Australian banking industry have increased rates without the RBA increasing it.
Therefore, a larger portion of consumer income is being spent on debt servicing. Owing to the fact that household spending accounts for more than 55% of the economy, this factor is a major concern and the outlook for RBA's monetary policy remains uncertain.
Correlation with China
S&P Global ratings downgraded China's sovereign rating by a notch to A+ from AA- and revised its outlook to stable from negative. This introduces massive uncertainty for the Chinese economy which is just days away from a leadership reshuffle.
China is also subject to geopolitical risks as Asian markets suffer from massive volatility due to North Korea's actions. Per the latest report by a Russian news agency, the RIA, a Russian lawmaker's recent visit to Pyongyang has revealed that North Koreans are prepping another long-range missile test that has the capability to reach the west coast of the United States. Moreover, North Korea's foreign minister Ri Yong Ho suggested that another hydrogen bomb test in the Pacific Ocean might be in the cards.
The Australian economy can be hugely affected by a slowdown in China's economy as Australia to a great extent is dependent on trade with China (read: Trump Takes First Step Toward Trade War? ETFs to be Impacted ).
Let us now discuss a few ETFs focused on providing exposure to the Australian economy (see all Asia-Pacific (Developed) ETFs here ).
IShares MSCI Australia Index Fund EWA :
This fund is the most popular Australia ETF in the space, offering exposure to the most liquid equities in the Australian economy. It tracks the MSCI Australia Index.
This fund has AUM of $1.8 billion and charges a relatively moderate fee of 48 basis points a year. From a sector look, Financials, Materials and Real Estate are the top three allocations of the fund, with 42.5%, 17.0% and 8.4% exposure, respectively (as of Oct 9, 2017). Commonwealth Bank Of Australia, Westpac Banking Corporation and Australia and New Zealand Banking Ltd are the top three holdings of the fund, with 10.5%, 8.6% and 6.9% allocation, respectively (as of Oct 9, 2017). The fund has returned 10.8% year to date and 7.6% in a year (as of Oct 10, 2017). EWA currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
WisdomTree Australia Dividend Fund AUSE :
This ETF is another popular fund offering exposure to the Australian economy and tracks the WisdomTree Australia Dividend Index.
This fund has AUM of $36 million and charges a fee of 58 basis points a year. From a sector look, Financials, Consumer Discretionary and Basic Materials are the top three allocations of the fund, with 24.4%, 17.0% and 14.2% exposure, respectively (as of Oct 6, 2017). Harvey Norman Holdings Ltd, Fortescue Metals Group Ltd and National Australia Bank Ltd are the top three holdings of the fund, with 4.1%, 3.3% and 3.3% allocation, respectively (as of Oct 6, 2017). The fund has returned 7.1% year to date and 5.2% in a year (as of Oct 10, 2017). AUSE currently has a Zacks ETF Rank #3 with a Medium risk outlook.
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