Australian equities have defied conventional wisdom this year. During Monday’s Asian session, the benchmark S&P/ASX 200 hit a five-year high.
Stocks in the world’s 12th-largest economy have climbed despite some trying times for emerging markets (China is Australia’s largest export market), slack commodities demand, a dollar that is broadly considered overvalued and concern that other sectors beyond mining and materials are not contributing enough to economic growth. [Interesting Views on Aussie Dollar ETFs]
None of that has derailed Australia ETFs and these funds still sport tidy dividend yields despite the Reserve Bank of Australia’s scorched earth rate-cutting campaign. Over the past two years, RBA has slashed rates by 225 basis points. However, Australia’s benchmark overnight cash rate of 2.5%, while low by the country’s standards, is high relative to much of the developed world.
Higher still is the 6.62% trailing 12-month yield on the WisdomTree Australia Dividend Fund (NYSEArca: AUSE). AUSE may not get the attention it deserves in the Australia ETF conversation, but that has not prevented a 90-day gain of nearly 12%.
Helped by the fact that Australia’s economy has not seen a real recession in over two decades, AUSE has delivered five-year returns of 77.2%.[ETF Spotlight: Single-Country Funds]
AUSE is not heavily allocated to the materials sector. That group is merely the ETF’s fourth-largest sector weight at 13.1%, 240 basis points behind industrials. Financials lead the way at almost 20.5% followed by consumer discretionary at 16.4%.
That sector breakdown implies AUSE, in the current environment, is a bet on RBA’s previous rate cuts taking shape and benefiting sectors outside of materials, a pivotal element to the Australian economy’s medium-term success.
Betting on further rate cuts to boost AUSE and Aussie stocks is a murky proposition.
“Market data indicate there is only an 11% chance RBA lowers rates at its November meeting and most traders now believe that if another rate cut is coming, it will happen in February 2014,” according to Investing.com.
Additionally, swaps data indicate traders only see a 22% chance RBA cuts rates by the end of 2013, down from 37% last month. That could be a harbinger of more upside for FXA.
On the other hand, PIMCO stands among the noteworthy market observers that have overtly said ex-mining contributions to Australian growth have been sluggish and that could portend further rate reductions. [If PIMCO is right, Aussie ETFs Merit Attention]
While a case can be made for further RBA rate cuts, although swaps data indicate otherwise, investors should remember that AUSE has thrived over the past five years. Over that time, the Aussie has been one of the best-performing G10 currencies, indicating a strong dollar has not necessarily hampered Australian stocks.
AUSE tracks the WisdomTree Australia Dividend Index, which as the chart below indicates, has soundly outpaced its benchmark over the past year.
