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Australia's GDP Growth Misses Expectations: ETFs in Focus

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Data released by Australian Bureau of Statistics show that the country’s GDP grew 0.8% sequentially in the second quarter of 2017 and 1.8% from the prior-year period. However, Australia’s GDP came in below market expectations of a 0.9% increase quarterly and a 1.9% rise year over year.


The most impressive thing is that the economy has grown for 26 straight years without a technical recession, when countries around the world are still recovering from the impact of the financial crisis that shook the world.


Factors Driving Growth


Household spending increased 0.7% during the quarter, which was a major factor driving the GDP growth. It contributed to an increase of 0.4% in GDP. Moreover, iron ore prices have shown relative resilience in recent times, helping drive economic growth.


However, analysts are of the opinion that this will not be sustainable, primarily because the rise in spending was driven by a fall in savings rate. Household savings rate fell to 4.6% from 5.3% in the March quarter.


Philip Lowe, governor of the Reserve Bank of Australia (RBA), thinks that this is a sign of confidence among consumers. However, wage growth in the country remains low and is not expected to rise in the near future. Moreover, high levels of housing debt are expected to weigh on future consumer spending.


Interest Rate


Australia’s housing market is booming and the Reserve Bank of Australia (RBA) kept rates unchanged at 1.5% in its September Monetary Policy Committee meeting for the 13th straight month. A few economists predict that the housing market has peaked and if the RBA goes on an aggressive rate-hike spree, the housing market could crash.


Moreover, tepid inflation concerns also cloud the outlook of monetary policy changes. Consumer prices in Australia increased 1.9% on a year-over-year basis in the second quarter of 2017 compared with 2.1% in the first quarter. The lower-than-expected inflation is primarily being attributed to falling oil prices. This strengthens the possibility of interest rates remaining unchanged in the near future.


Retail Sales


Retail sales were flat in July on seasonally adjusted terms, below market forecast of a 0.2% increase. Excluding food, sales growth declined 0.5%.


Owing to flat sales in July, year-over-year growth in sales declined to 3.6% in July compared with 3.7% in June.


Geopolitical Risks and Trade War


North Korea conducted its sixth nuclear test, that of a hydrogen bomb, which can be mounted on an Inter Continental Ballistic Missile, on Sep 3, 2017. Kim Jong-Un’s actions have caused massive unrest in several Asian economies and in the United States.


Moreover, United States President Donald Trump has suggested that he could consider stopping trade with countries doing business with North Korea. This could impact China greatly as it is North Korea’s biggest trade partner (read: ETFs to Lose If Trump Bans Trade With North Korean Partners).


In a separate development, Trump’s administration has taken an unconventional route to protectionism. It is formally investigating if China is violating international trade laws relating to intellectual property rights. The Australian economy can be hugely affected by a potential U.S.-China trade war as Australia to a great extent is dependent on trade with China (read: Trump Takes First Step Toward Trade War? ETFs to be Impacted).


Let us now discuss a few ETFs focused on providing exposure to the Australian economy (see all Asia-Pacific (Developed) ETFs here).


IShares MSCI Australia Index Fund (EWA - Free Report) :


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 $1.80 billion and charges a relatively moderate fee of 48 basis points a year. From a sector look, Financials, Materials and Real Estate are the top three allocations of the fund, with 41%, 17.33% and 8.47% exposure, respectively (as of Sep 6, 2017). Commonwealth Bank Of Australia, Westpac Banking Corporation Corp and Australia and BHP Billiton Ltd are the top three holdings of the fund, with 10.05%, 8.19% and 67.02% allocation, respectively (as of Sep 6, 2017). The fund has returned 11.02% year to date and 11.95% in the last one year (as of Sep 7, 2017). EWA currently has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: China's Inflation, Debt & Impact on Australia: ETFs in Focus).


WisdomTree Australia Dividend Fund (AUSE - Free Report) :


This ETF is another popular fund offering exposure to the Australian economy and tracks the WisdomTree Australia Dividend Index.


This fund has AUM of $37.65 million and charges a fee of 58 basis points a year. From a sector look, Financials, Consumer Discretionary and Basic Materials are the top three allocations of the fund, with 23.50%, 17.11% and 14.57% exposure, respectively (as of Sep 7, 2017). Harvey Norman Holdings Ltd, Fortescue Metals Group Ltd and National Australia Bank Ltd are the top three holdings of the fund, with 4.09%, 3.77% and 3.12% allocation, respectively (as of Sep 7, 2017). The fund has returned 9.25% year to date and 10.98% in the last one year (as of Sep 7, 2017). AUSE currently has a Zacks ETF Rank #3 with a Medium risk outlook.


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