Winds of Political Change Could Weigh on Australia ETFs

ETF Trends

Already under pressure due to dwindling global commodities demand and a plunging currency, Australian stocks and the ETFs that house them could face additional headwinds as political winds of change blow in the world’s 12th-largest economy. Last week, in a stunning turn of events, former Prime Minister Kevin Rudd regained Australia’s top elected position after ousting Julia Gillard from that spot.

The news heartened what is viewed as a fractured Labor Party and Rudd immediately gained six points in the polls while his conservative opponent, Tony Abbott lost the same amount. Australia ETFs tell a different story. The iShares MSCI Australia ETF (EWA) is down 2.1% in the past five days while the WisdomTree Australia Dividend ETF (AUSE) is lower by 1.3%. [Dark Clouds For Australia ETFs]

The problem with Rudd gaining steam is that if he beats Abbott, chances are high Australia will face a hung parliament, a situation some market observers view as the worst-case scenario. The “recent shake-up has introduced a new element of uncertainty for investors; even the date of the election is no longer certain…,” reports Katie Holliday for CNBC.

Political headwinds in Australia have emerged as Australian stocks and ETFs such as EWA and AUSE have been stung by a combination of speculation regarding the end of quantitative easing by the Federal Reserve, weak commodities prices, slack Chinese economic data and Australia’s own disappointing data points. [Plunging Aussie Not Yet Helping Equity ETFs]

EWA, the largest Australia ETF, is down almost 12% year-to-date. In the three years Gillard was in power, the ETF gained nearly 8%. Although Rudd has captured some momentum, at least for now, voters are fickle and Rudd has regained power at a time when the Australian economy is fragile.

During Tuesday’s Asian session, the Reserve Bank of Australia left interest rates unchanged at a record low of 2.75%. It was widely expected that RBA would do that, but many traders and market observers expect RBA will not leave rates at 2.75% for the rest of this year.

However, the weak Aussie could crimp plans for additional rate cuts. The Australian dollar is the second-worst performing developed market currency in the world this year trailing only the Japanese yen. EWA bulls may not want Rudd to remain in power for long. The last time he was prime minister the ETF lost nearly 29%.

iShares MSCI Australia ETF

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EWA

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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