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Australia ETFs
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About Australia ETFs |
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Global ETFs Australia Overview and forecast
There's only one operating ETF in the Australian market at the moment, iShares MSCI Australia Index Fund (EWA) but this is a good study of how ETFs can work in specific markets. The Australian index has outperformed the S&P
500 consistently for decades. The market is exposed to the big Asian markets, China and Japan, with increasing interest from India. That's added some dynamics to the Aussie market.
The Australian market is very much interlocked with the Asian market, and it's a huge export market. Obviously, the global meltdown hasn't helped, and the index went down from around 6000 to roughly 3500-3800. Meaning there's a big upside to this market.
The main drag of Australian blue chips includes some real giants, like BHP Billiton, News Corp, Westfield, three of the world's top rated banks, and the big local retailer Woolworths. (not related to the US company, from which it separated in the 1960s.) Many of these stocks trade around the world, partly through investor positioning, and partly due to a relatively soft, highly traded local currency, which is highly mobile, and allowing income from forex as well.
The Australian market is a bit different from the S&P in other ways. Investor returns from the Australian index are decisively higher over the last 20 years. The share market is fully modern, (Compushare, which operates a lot of registries in the US, is actually Australian) and capitalization is handled differently from the main drag of S&P stocks.
Short term (6 months)
For a relatively small demographic, Australia has a lot of capital in its investment markets. That improves ratios, in terms of volumes and margins. Australia's hard hit export market is starting to show what are somewhat
satirically called green shoots, re- growing.
It's also a complex market. The presence of a lot of highly mobile Asian investment money means that movements are sometimes extremely rapid. The Asian investors reposition for their own local markets and the US at billions per click speeds. This is a truly international market. The short term is always worth watching in this market, and margins are worth watching in trading terms. EWA is also a very high volume trader, in the millions on a more or less daily basis, with some steep moves upward at times during the first and second quarters of 2009. If you're incorporating forex into the equation, it can work out as a double profit, so the short term is looking pretty good.
Medium term (2 years)
Current expectations are that the global recovery will kick in during 2011. In that time, it's reasonable to expect that other ETFs will start looking at this market. It makes sense, because the Australian index is generally a better performer as the FTSE, DAX, and in recent years the Nikkei. EWA is now part of the market, in a meaningful way, and it's unlikely this monopoly position will continue, when the expected next market high is around 6- 7000, up from the mid 3000s.
At this point, the nature of the Australian market is very relevant. This market is no stranger to booms, and with them are some real bubbles and quagmires. If you don't know the Australian index, it's advisable to do some behavioral studies before investing. Experienced investors, particularly those in the global markets, can tell you that this market behaves differently, and it's an acquired taste in terms of timing buying and selling. It doesn't look like other markets, which makes it look more placid than it is.
The market leaders really do dominate the weightings of the indices. These are huge global companies, and the performance of both the index and any related ETFs are always going to be affected by their price moves. These things are real day trader stocks, and they move fast. Investors should recognize that they're dealing with major stock patterns.
Long term (5 years)
In its favor, EWA, as a major index ETF, has followed the Australian market faithfully through the original dive and back up. The expectation is that the Australian market, in a recovery, will go back up to its peaks and beyond. That's been the invariable response to every crash. Whether EWA is the only Australian index ETF or not, it's fair to say that the long term outlook is getting close to excellent.
When the export markets revive, which in Australia's case means when China gets organized and when Japan wakes up, the mining sector will be back on its high road. The other big sector, not usually recognized outside Australia, is the finance sector, which compared to the rest of the world, is in very good condition. The Australian banks managed to avoid much more than a few cuts and scratches from writedowns, and are still profitable in a non- patronizing way for investors.
Qualifiers to projections
Investors need to recognize that this market, and its indices, do not react the same way, or to the same degree, as other markets. The two main Australian indices, the All Ordinaries, and the ASX 200, will echo the Dow to some degree, but usually in different percentages to the Dow, up and down. Not all factors in index moves are traceable to direct stock moves, but often to the futures markets, and the movement of foreign capital in response to Dow or other moves. Any foreign investor would be advised to get a general feel for the market, before moving in.
For major investors, some modeling is suggested, as a basic workout of strategies. Australia has been consistently outperforming other OECD countries for years, prior to the crash, and has been doing better during it. That said, local knowledge and thought is required. EWA itself is a $500 million US ETF, making it bigger than a lot of US ETFs, and it trades well.
In future other ETFs entering the Australian markets may choose indices like the mining index, etc, and their behavior will sometimes be very much at odds with the main indices. It's strongly advised to check out sectors in some detail, in those cases.
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Last Updated on: 2010-01-14 02:03:40 |
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