Will Slow GDP Growth Take A Beating On Australia ETFs?

Australia’s GDP grew slower than expected by economists, as bad weather led to a fall in exports. Construction activity further dragged down the GDP growth, weighing on gains provided by strong household activity.

Latest data released by the Australian Bureau of Statistics reflected a somewhat mixed picture for that economy. However, growth is still weak enough for the Reserve Bank of Australia (RBA) to think of adopting a rate hike stance, in line with its peers in the developed world.

Into the Headlines

In the fourth quarter of 2017, GDP grew 0.4% sequentially compared with an upwardly revised 0.7% in the previous quarter and below economists’ expectations of a 0.6% increase. On an annual basis, it grew 2.4% compared with an upwardly revised 2.9% in the prior quarter.

Household spending drove growth in the fourth quarter of 2017, increasing 1% for the period after an upwardly revised 0.5% growth in the previous quarter, adding 0.6 percentage points to GDP. “Growth this quarter was driven by the household sector, with continued strength in household income matched by growth in household consumption,” per a Business Insider article citing Bruce Hockman, Chief Economist at the ABS.

However, higher imports and lower exports contributed negatively to GDP, decreasing 0.1 percentage points and 0.4 percentage points respectively from the quarterly figure. Moreover, construction of dwellings and non-dwellings were also a drag on GDP growth, decreasing 0.1 percentage points and 0.4 percentage points respectively on a sequential basis.

What Lies Ahead?

Per the Australian Bureau of Statistics, the country’s headline consumer price index (CPI) increased 1.9% in the fourth quarter on a year-over-year basis, below the Reserve Bank of Australia’s 2% target but above 1.8% recorded in the previous quarter.

RBA left its official cash rate intact at 1.5% in its latest policy meeting. The recent weakness in GDP growth is expected to give the RBA some time to hold on to the rates.

However, RBA governor Philip Lowe seems optimistic about inflation making a comeback. "Investors should have confidence that, over time, CPI inflation in Australia will average between 2 and 3 per cent," Lowe said. "They can expect some variation from year to year, but over the medium term the average inflation rate will be 2 point something," he added.

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:

This fund is the most-popular Australia ETF, offering exposure to the most-liquid equities in this economy. It tracks the MSCI Australia Index.

This fund has AUM of $1.6 billion and charges a relatively moderate fee of 49 basis points a year. From a sector look, Financials, Materials and Real Estate are the top three allocations of the fund, with 40.5%, 17.5% and 8.1% exposure, respectively (as of Mar 7, 2018). Commonwealth Bank Of Australia, Westpac Banking Corporation and BHP Billiton (LON:BLT) Ltd are the top three holdings of the fund, with 10.0%, 7.7% and 7.2% allocation, respectively (as of Mar 7, 2018). The fund has returned 9.6% in a year. EWA has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

WisdomTree Australia Dividend Fund AUSE:

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

This fund has AUM of $35.1 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 24.1%, 16.2% and 13.7% exposure, respectively (as of Mar 8, 2018). Tabcorp Holdings Ltd, Harvey Norman Holdings Ltd and National Australia Bank Ltd are the top three holdings of the fund, with 4.1%, 3.7% and 3.0% allocation, respectively (as of Mar 8, 2018). The fund has returned 10.1% in a year. AUSE has a Zacks ETF Rank #3 with a Medium risk outlook.

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