Australia ETFs: Australia’s long-term outlook remains strong

Mar 7th, 2012 | By | Category: Equities

Australia’s economy expanded by less than expected in the fourth quarter of 2011, with GDP rising 0.4% in the three months to the end of December compared with the previous three months. However, the economy is expected to pick up due to high levels of mining-related investment and is on track for growth of 3-3.5% this year and next. [List of Australia ETFs]

Australia ETFs - Economic growth slows, but long-term outlook remains strong

With larger developed markets stuck in a slow-growth regime, defined by excessive debt, structural deficits, high unemployment and deteriorating demographics, Australia represents a highly attractive proposition.

The Australian economy is heavily oriented towards its resources sector for growth and has benefited from strong demand from fast-growing emerging markets such as China, its largest trading partner. In recent months, however, demand has weakened as economies like China have slowed.

The terms of trade, which represent the relationship between the prices of exports and imports, fell 4.7% in seasonally adjusted terms in the December quarter following a 3.2% increase in the September quarter. This is the first fall in the terms of trade since September quarter 2009.

Despite this, the growth figures were solid given the world was facing some of the toughest conditions in the global economy since the height of the financial crisis.

Indeed, the Australian economy grew by 2.3% in the fourth quarter, when compared to the same period last year, and the Reserve Bank of Australia still expects growth of 3-3.5% this year and next.

These numbers reflect the Australian economy’s strong fundamentals and enduring resilience in uncertain times, with larger developed economies like Germany, Japan, the UK and Italy contracting in the same quarter.

FEATURED PRODUCT

Lyxor ETF Australia (LAUS)

– Tracks the S&P/ASX 200 Index providing
diversified exposure to the 200 largest and
most liquid Australian companies

– Fully-collateralised swap-based replication,
thereby minimising tracking error, with full
transparency to collateral holdings

– UCITS III compliant, London listed, UK
Reporting Status, eligible for ISAs and SIPPs

– TER of just 0.40%, considerably less
than actively managed Australia funds

This resilience is seen in a number of indicators including household consumption, exports, imports, and business investment. For example, despite the impact of global events on consumer confidence, household consumption grew by 0.5%; in full-year terms, consumption grew by 3.5%.

Exports also increased strongly in the quarter, up 2.2%, driven by growth in rural and non-rural commodity exports.  Iron ore export volumes reached a record high in the quarter, rising by 6.1%, and, encouragingly, the Queensland coal industry continued to recover in the wake of last summer’s flooding.

Imports increased 0.7% in the quarter, a slower pace than in recent quarters. Imports of capital goods continued to grow strongly but this was offset by falls in imports of consumption goods, intermediate goods and services.

Business investment declined a little in the quarter after a very strong rise in the September quarter, but remains 18.9% higher through the year. This outcome was held down by the lumpy nature of the investment pipeline, given the enormous scale of individual projects.

Looking through the quarter-to-quarter volatility in the data, the outlook for investment is extremely positive, with the construction of major resource projects now well underway and further large projects in the pipeline.

The Australian Bureau of Statistics’ Private New Capital Expenditure and Expected Expenditure (capex) survey released last week reported that businesses expect to spend nearly $173 billion on capital expenditure in 2012‑13, an increase of over 28% from the corresponding estimate for 2011-12.  Expected capital expenditure for the mining industry in 2012-13 is over 50% higher than the corresponding estimate for 2011-12.

Although growth moderated over the final three months of last year, all in all Australia’s fundamentals remain strong. Low unemployment, sturdy public finances, very low debt, contained inflation, and a huge pipeline of investment provide a solid foundation for the economy.

Therefore, with larger developed markets stuck in a slow-growth regime, defined by excessive debt, structural deficits, high unemployment and deteriorating demographics, Australia represents a highly attractive proposition for international investors.

Moreover, despite all these advantages, investors can pay approximately the same price for a dollar of earnings in Australia as they would for the same earnings in the United States, Europe, or Japan, according to research by Blackrock. To the extent that investors are getting better fundamentals for the same price, they should consider an overweight position in Australia.

Blackrock also suggest that a longer-term position in Australia may be justified on the basis of its currency. Imbalances in many of the larger developed countries, they say, may ultimately manifest in long-term depreciation of their currencies. Countries like Australia are well placed to benefit from this trend and can provide additional diversification for investors.

For investors wishing to gain exposure to Australian assets, there are a number of London-listed ETFs to choose from, tracking a range of different equity, currency and fixed income indices. There are also a number of foreign-listed funds worth considering for more targeted exposure.

The Total Expense Ratio (TER) and replication methodology are detailed after each fund name and ticker. Funds are London (LSE) listed unless stated.

Australian Equities

The MSCI Australia Index offers exposure to Australian stocks which comply with MSCI’s size, liquidity, and free float criteria. The index is market-capitalisation weighted and reflects the performance of companies within the top 85% of the Australian investable equity universe. The index currently has 67 constituents.

iShares MSCI Australia ETF (SAUS) TER 0.59% Physical replication

Credit Suisse MSCI Australia ETF (CSAU) 0.50% Physical

 The S&P/ASX 200 Index covers the performance of the 200 largest and most actively traded Australian companies. The index represents approximately 78% of Australian equity market capitalisation. The index combines S&P/ASX 100 and 100 additional stocks to cover beyond the large and mid cap segments of the Australian market.

DB X-trackers S&P/ASX 200 ETF (XAUS) 0.50% Swap-based

Lyxor ETF Australia (LAUS) 0.40% Swap-based

Pacific / Asia Pacific ex Japan Equities

The MSCI Pacific ex Japan Index offers exposure to stocks from developed countries in the Pacific region excluding Japan which comply with MSCI’s size, liquidity, and free float criteria. The index is a market-capitalisation weighted and designed to measure the performance of the largest companies in Australia, Hong Kong, Singapore and New Zealand. Australia is currently by far the largest country constituent with a weight of 65%.

iShares MSCI Pacific ex-Japan ETF (IPXJ) 0.60% Physical

HSBC MSCI Pacific ex Japan ETF (HMXD) 0.40% Physical

Amundi ETF MSCI Pacific ex Japan (CP9) 0.45% Swap-based

The Dow Jones Asia/Pacific Select Dividend 30 Index offers exposure to the 30 highest dividend-paying stocks from developed countries in the Asia Pacific region, namely Australia, Hong Kong, Japan, New Zealand and Singapore. Only companies are included that have a non-negative historical three-year dividend-per-share growth rate and an average dividend to earnings-per-share ratio of less than 85%. Australia is currently the largest country constituent with a weight of 43%.

iShares DJ Asia/Pacific Select Dividend 30 ETF (IAPD) 0.59% Physical

The FTSE RAFI Asia Pacific Ex-Japan Index is designed to track the performance of the largest companies in Australia, New Zealand, Hong Kong and Singapore based on the following four fundamental measures of firm size: book value, income, sales and dividends. The equities with the highest fundamental strength are weighted by their fundamental scores. Australia is currently the largest country constituent with a weight of 40%.

PowerShares FTSE RAFI Asia Pacific Ex-Japan ETF (PSRA) 0.80% Physical

Australian Dollar (AUD)

Issued by ETF Securities, ETFS Long AUD Short GBP is designed to track the MSFX Long Australian Dollar/GBP Index (TR) which aims to reflect movements in exchange rates between the two currencies, plus exposure to local interest rates.

ETFS Long AUD Short GBP ETC (GBAU) 0.39% Swap-based

Australian Fixed Income

The DB Australia SSA Bonds Total Return Index developed by Deutsche Bank aims to be representative of the domestic Australian bond market and intends to reflect, via a rules-based methodology, the economic performance over time of a notional dynamic portfolio of AUD-denominated bonds issued by Australian Sovereigns, foreign sovereigns, supranational organisations, sovereign agencies or local government authorities meeting the relevant eligibility criteria.

This fund is Singapore listed but registered for distribution in the UK and has Fund Reporting status.

DB X-trackers Australia SSA Bonds TR Index ETF (K6Y SP) 0.25% Swap-based

Specialist US-listed Australia funds

WisdomTree Australia Dividend ETF (NYSE: AUSE) 0.58%

Index IQ Australia Small Cap ETF (NYSE: KROO) 0.69%

First Trust Australia AlphaDEX ETF (NYSE: FAUS) 0.80%

iShares MSCI Australia Small Cap Index ETF (NYSE: EWAS) 0.59%

PIMCO Australia Bond Index ETF (NYSE: AUD) 0.45%

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