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Is This the Right Time to Buy Australia ETFs?

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The Australian economy has some good news for investors. Before grappling with issues like bushfires and the coronavirus outbreak, the Australian economy expanded at a better-than-anticipated rate in the fourth quarter of 2019. The economy grew at an upwardly revised 0.6% from the third quarter of 2019, beating analysts’ expectations of 0.4% growth. Australia’s economy grew 2.2%, year over year.

The upbeat results have been supported by three interest-rate cuts between June and October, along with tax rebates. These initiatives helped consumers by increasing their savings. Accordingly, in the final quarter of 2019, household expenditures flared up 0.4% and government spending increased 0.7%. These metrics accounted for 0.2% and 0.1% of economic growth, respectively.

Will This Economic Growth Momentum Continue?

Some economic fundamentals look disappointing in the fourth-quarter 2019 economic report. Dwelling and non-dwelling construction both weakened 0.2% from GDP. The savings rate came in at 3.6% comparing unfavorably with the third quarter’s 4.8%.

Moreover, the bushfires in Australia do not paint a rosy picture either for the days to come. These fires have burnt down more than 12 million acres and wiped out around one billion animals.

Coronavirus and Australian Economy

Analysts believe the coronavirus outbreak will have detrimental impact on Australia’s near-term growth outlook by majorly affecting the exports, education, and tourism sectors. China is the key trading partner of Australia. Australia exports considerable amount of materials (from iron ore to LNG), foods (from lobster to lamb), and bionic ear technology to China. In fact, per Australian Bureau of Statistics data, Australia exported 13.89 billion Australian dollars ($9.1 billion) worth of products to China last December. These exports made around 34% of total exports for the month.

Meanwhile, the travel restrictions due to the corona scare might affect the top Australian universities, as Chinese students make up about 60%  of the international students at these institutions. In fact, Chinese students make 0.6% of Australia’s GDP.

Going on, per the Australian Bureau of Statistics, 1.33 million out of the 8.66 million visitors were Chinese in the 12-month period ending September 2019. Therefore, with February being the peak period for Chinese travelers, the travel ban can largely erode Australia’s GDP.

Summing up, Mathan Somasundaram, a market portfolio strategist at Blue Ocean Equities, has said that “the world looks at Australia as a proxy for China. Simply put, they sneeze and we are sick. China shutdown will cut into their GDP growth and definitely (would) do damage to Australian GDP growth.”

Nevertheless, in order to combat the coronavirus outbreak and revive the struggling economy, the Reserve Bank of Australia has slashed the cash rate by a quarter percentage point to 0.5% to a record low.

Australian ETFs in Focus

Against this backdrop, investors can keep a tab on the following ETFs:

iShares MSCI Australia ETF (EWA - Free Report) — down 10.7%, year to date

The fund provides exposure to large- and mid-sized companies in Australia and tracks the MSCI Australia Index. It has an AUM of $1.30 billion. Holding a basket of 70 stocks, the fund has an expense ratio of 50 basis points (bps). It trades in daily average volumes of 2.8 million shares. The fund carries a Zacks Rank #3 (Hold), with a Medium-risk outlook (read: Coronavirus Puts These Country ETFs on High Alert).

Franklin FTSE Australia ETF (FLAU - Free Report) — down 10.7%

The fund provides targeted exposure to large- and mid-sized companies in Australia and tracks the FTSE Australia Capped Index. It has an AUM of $10.5 million. Holding a basket of 103 stocks, the fund has an expense ratio of 9 bps. It trades in daily average volumes of 4,000 shares. The fund carries a Zacks Rank of 3.

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