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Down Under Disappointment


Add Australia to list of development markets disappointments to start 2014.

Dating back to late 2011, the Reserve Bank of Australia pulled out plenty of rate-cutting stops to jolt the world’s 12-th largest economy. The result is Australia now has a benchmark interest rate of 2.5%, a record low.

RBA’s rate cuts have had the desired impact weakening the Australian dollar. Over the past three months, the CurrencyShares Australian Dollar Trust (FXA) has tumbled 8.6%, but that has not done much to buoy the fortunes of the local economy or the iShares MSCI Australia ETF (EWA) . [Good News for Aussie Bears]

EWA has moved in near lockstep with FXA as the former has dipped 9% in the past three months, an ominous sign for an ETF an economy that should be benefiting from lower interest rates and a weaker currency.

Although materials stocks account for 19% of EWA’s weight, far below the 50.2% the ETF allocates to the financial services sector, Australia’s status as a major commodities producer has hampered its economy and EWA. For at least year, RBA has said it wants to see more contributions to the Australian economy from non-mining sectors. That is not happening and EWA is down almost 2% since the start of the year. [Ominous Iron Ore Forecast Hampers Australia ETFs]

Although currency traders are betting RBA will lower rates again when it meets next month, a surprise jump in fourth-quarter inflation could take rate cuts off the table in the near-term.

“Underlying inflation, which is more closely watched by the Reserve Bank and is a combination of the mean and weighted median measures, rose by 0.9 per cent in the fourth-quarter and by 2.6 per cent year-on-year,” the Sydney Morning Herald reported, citing the Australian Bureau of Statistics.

A constrained arsenal for RBA could mean a near-term bump for the Aussie, but  likely the opposite for Australian stocks. As it is, the market has its detractors.

“We have downgraded our view of Australia to underweight from neutral. Australian valuations look expensive relative to other developed market valuations, considering that the country’s growth outlook is weakening thanks to fading mining investment, rising unemployment rates and sluggish wage growth,” BlackRock Chief Investment Strategist Russ Koesterich in research released earlier this month.

iShares MSCI Australia ETF

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. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.