The iShares MSCI Australia ETF (NYSEArca: EWA) is down more than 4%, but stocks there could be steady plays as 2018 moves along. Australia is one of the largest developed market economies in the Asia-Pacific region and home to some of the highest interest rates in the developed world.
Thanks to comparatively high interest rates, Australia ETFs like EWA sport enticing dividend yields, which can help investors generate current income while expanding the international portions of their portfolios. EWA has a trailing 12-month dividend yield of 4.72%, or more than double the comparable yield on the S&P 500.
Additionally, Australia has one of the best sovereign debt ratings of any major economy.
“Australia’s ‘AAA’ rating is underpinned by strong governance, high income levels, and a track record of macroeconomic stability. An effective policymaking framework has supported 26 consecutive years of GDP growth without a recession, despite substantial external, financial and commodity price shocks during this period,” according to Fitch Ratings.
What To Expect from RBA
While the Reserve Bank of Australia (RBA) may be at the end of its easing cycle, there are few, if any, signs that the central bank there is poised to embark upon a tightening cycle.
The $1.46 billion EWA tracks the MSCI Australia Index and holds 69 stocks. The ETF allocates over 39% of its weight to financial services stocks, more than double its second-largest sector weight, which is materials.
“Australia’s general government debt ratio, at 41.2% of GDP in FY17, is in line with the ‘AAA’ median. Nevertheless, a 22pp rise in public debt since 2010, when debt/GDP was 34pp lower than the ‘AAA’ median, has eroded the country’s previous fiscal strength relative to peers. Fitch continues to expect general government debt to peak in FY18, at 41.8% of GDP, and to maintain a downward trajectory thereafter,” according to Fitch.
Australia’s economic growth is expected to be solid and above the average rate forecast for other AAA-rated countries.
“Fitch forecasts a modest acceleration in GDP growth from 2.3% in 2017 to 2.7% in both 2018 and 2019, above the ‘AAA’ median,” said Fitch. “Growth will be supported by higher non-mining private investment and public infrastructure investment, particularly as the drag from the substantial multi-year decline in mining investment fades.”