Will Downbeat Australian GDP Data Pull These ETFs Down?

The Australian economy has contracted for the first time in the last five year, sending the country’s currency on a southward journey. The Australian currency slid as much as 0.6% versus the U.S. dollar. The steep fall was primarily owing to a sharp drop in business investment, housing construction and public spending.

In the third quarter of 2016, the country’s gross domestic product (GDP) fell 0.5% sequentially, as against a gain of 0.6% in the previous quarter. In the quarter, government spending and resource exports failed to lift growth. On an annual basis, GDP grew 1.8% in the reported quarter, much lower than growth of 3.1% in the second quarter. The reported quarter figure was below both Treasury estimates and central bank forecasts.

Is this a Reversal of Trend?

Amid concerns over the impact of Brexit, sluggishness in emerging markets and global growth fears, Australia, which belongs to an elite group of countries with AAA rating, has continued on the growth path in the recent years. In the past 25 years, the country has recorded only three quarters of negative growth (read: Is it Australia's Turn for a Downgrade? ETFs in Focus).

However, the prospects of the country do not look flattering with the end of the mining investment boom and continued slump in commodity prices. Meanwhile, data from the country’s labor market is also not encouraging. Australian labor market conditions failed to meet expectations in October following back-to-back declines in August and September. According to the Australian Bureau of Statistics, employment rose 9,800 in the month. However the figure was well below forecast of an increase of 16,000. Although, the jobless rate was 5.6% lower than economists’ forecast of 5.7%, workforce participation fell to a decade low.

The disappointing data could pose a challenge to the Reserve Bank of Australia (RBA), which held the key rate at a record low of 1.5%. The central bank has indicated its reluctance to ease fiscal policy further to boost growth as it could impact its rating. The RBA last reduced cash rate in August with an objective to help the economy grow at a faster pace and inflation to pick up. Though the Australian central bank expressed its concerns that inflation may remain low in the next two years or more, the bank thinks that the economy has potential to record strong growth (read: Reserve Bank of Australia Cuts Rate Again: ETFs to Watch).  

Meanwhile, Trump’s triumph doesn’t bode well for Australia. The Obama administration has been negotiating the Trans-Pacific Partnership or pan-Pacific trade agreement among 12 nations of the Pacific Rim. Countries like Japan and Australia are part of this. But Trump does not find this deal to be in the best interest of America (read: Foreign ETFs to Win or Lose on Trump Victory).

Despite the downbeat data, some positive number however grabbed attention - terms of trade improved 4.5%, real net national disposable income went up 0.8% and household consumption grew 0.4%. An economist at Commonwealth Bank of Australia is of the view that the decline in third quarter is “a pothole rather than the start of something more sinister”

Despite the heightened uncertainty and other challenges, investors expecting a turnaround in Australian economy can have a look at the following ETFs (see all Asia-Pacific Developed ETFs here).

ETFs in Focus

iShares MSCI Australia ETF EWA

EWA tracks the MSCI Australia Index and holds 71 stocks in its basket. The top two firms have one-fifth allocation while other firms hold less than 7% share in the basket. From a sector look, financials dominates the fund’s return at 42.8%, followed by materials (16.1%). This fund has an AUM of $1.8 billion and average daily volume of more than 2.3 million shares. It charges 49 bps in annual fees and has gained 11% so far in the year (as of December 6, 2016). It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Australian ETFs in Focus after Jobs Data Fails to Impress).
 
WisdomTree Australia Dividend Fund AUSE
    
This fund follows the WisdomTree Australia Dividend Index. It has an AUM of $36.1 million and trades in paltry volume of less than2,000 shares a day on average. Expense ratio comes in at 0.58%. Holding 63 stocks in its basket, the product is widely diversified as none of the components holds more than 4% of the assets. Sector-wise, it has a definite tilt toward financials at 23.8%, followed by materials (22.8%), consumer discretionary (14.1%) and industrials (10.1%). The fund has gained 19.6% so far this year and has a Zacks ETF Rank of 3 with a Medium risk outlook.

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ISHARS-AUSTRAL (EWA): ETF Research Reports
 
WISDMTR-AUS DVD (AUSE): ETF Research Reports
 
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