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Australia Keeps Rates Unchanged: ETFs in Focus

The Reserve Bank of Australia (RBA) has kept its key cash rate steady at 1.5% for the eighth month in a row, as it continues to battle rising house prices, subdued economic growth and inflation.


Home prices in Australia are rising at the fastest pace in seven years. The latest figures show property prices up in double digits in four of Australia’s eight major cities. Property prices have increased 12.9% on an average in the past year. It rose 18.9% in the past year in Sydney alone at the fastest pace in 15 years. Analysts already believe there is a housing bubble, which is being blamed at the RBA’s decision to cut rates twice last year to 1.5%. Moody’s has warned that an increasing number of borrowers have missed their mortgage payments due to decelerating wage growth and underemployment among other factors.


Owing to a warning by banking regulator, the Australian Prudential Regulation Authority (APRA), many banks have increased rates on their investor and interest only loans, which is expected to take some pressure off from the housing boom. This comes as a respite for the RBA, as it can refrain from rising key rates immediately because of the threat of reduced economic growth.


The main area of focus for the RBA will be the CPI data, set to release at the end of April. Before increasing interest rates, RBA needs to take inflation into account. The RBA is expected to change its course if the CPI number is higher than expected, which may lead to a different stance on interest rates in the coming months. However, it is difficult to predict what the RBA may or may not do next month, and how it handles the dilemma of neither being able to hike rates, nor cut them.


Amid increased worries regarding a potential housing bubble and the uncertain trajectory of interest rates over the following months, let’s discuss about the following Australia ETFs (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 $1.95 billion and charges a relatively moderate fee of 49 basis points a year. The fund is heavy on Financial Services (43.76%), Basic Materials (14.86%), and Real Estate (8.41%). It bears significant concentration risk with over 56.5% allocated to its top 10 holdings. The fund returned 11.42% year to date and 22.5% over the last one year (as of April 1, 2017).


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 $36.3 million and charges a fee of 58 basis points a year. The fund is heavy on Financials (25.73%), Basic Materials (22.05), and Consumer Discretionary (13.47%). It bears relatively less significant concentration risk with 32% allocated to its top 10 holdings. The fund returned 7.81% year to date and 21.41% over the last one year (as of April 1, 2017).


PDR MSCI Australia Quality Mix ETF QAUS:


This fund tracks the MSCI Australia Quality Mix A-Series Index, which is an index of Australian securities derived from three sub-indexes based on one of the three factors: quality, low-volatility, and value. Each sub index receives equal weight.


This fund has AUM of $13.12 million and charges a relatively moderate fee of 30 basis points a year. The fund is heavy on Financials (32.95%), Basic Materials (14.95%), and Consumer Staples (12.21%). It bears significant concentration risk with almost 50.5% allocated to its top 10 holdings. The fund returned 10.09% year to date and 12.25% over the last one year (as of April 1, 2017).


To Conclude


Australia had a stellar earnings season in the last quarter of 2016, the best in a decade. The Australian equity rally due to the stellar performance and the Trump rally seems to be losing momentum, as investors question President Trump’s ability to implement his proposed policies after the healthcare bill failure.  Moreover, Australia’s trade surplus rebounded to $3.6 billion in February, the fourth successive monthly surplus (read: Trumpcare Collapse Fuels Rally in Healthcare Stocks & ETFs).


However, what’s concerning is that Australia’s consumer confidence dropped 2.4% to 111.1 in the week ending April 2, 2017 from 113.8 the preceding week. This is the lowest level since October 2015. The outlook for interest rates and housing prices remains uncertain, as Australia adopts a wait and see approach for its rates.


The most likely future activity by the RBA would be a hike in rates. The timing is still uncertain because of rising house prices and subdued growth. The RBA needs to adopt a very careful approach to monetary policy  if it wants to put a break to a prospective housing bubble without bursting it (read: Buy Hot Tech ETFs to Avoid Trump Uncertainties).


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ISHARS-AUSTRAL (EWA): ETF Research Reports
 
SPDR-MSCI ASF (QAUS): ETF Research Reports
 
WISDMTR-AUS DVD (AUSE): ETF Research Reports
 
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