Four Reasons Why Aussie ETF May Dodge Recession

The Aussie economy and exchange traded fund (ETF) are looking up from down under. The International Monetary Fund (IMF) has given an upgrade and just a minor contraction is expected for this year.

Here are some reasons why things in Australia are looking up:

• The IMF has upgraded their economic outlook for Australia this year: it now predicts a small contraction, followed by a big rebound in 2010.
• Rachel Pannett and Enda Curran for The Wall Street Journal report that the upbeat views coincide with latest forecasts from the Organization for Economic Cooperation and Development (OECD), which also predicts a mild downturn this year. The revisions are in response to steps the government took to mitigate the downturn.
• Business sentiment was also positive for June for the first time since December 2007, and borrowing costs will stay historically low and unchanged. The sentiment index rose 6 points to 4, after holding below zero for the previous 17 months.
• The growing business sentiment is indication that the economy may dodge the global recession. And there is nothing dodgy about that.

• iShares MSCI Australia Index (EWA): up 23.8% year-to-date

For more stories about Australia, visit our Australia category.

Comments

[Ron Rowland:]

EWA fell -67%. I wouldn't call that dodging the recession.

Jul 17 09:52 AM

[van Schayk:]

Australia -- "The Lucky Country" -- will continue to benefit from Asian growth. Its natural resource base is well known. Less so are its burgeoning high tech industries propelled by a world class system of higher education. I'm definitely bullish on its long term prospects.

Jul 17 01:14 PM

[Maxe Paul:]

A few points to consider from an Australian point of view.

Well we "have dodged" a recession at this stage, the only developed country to do so, i believe due to China's commodities restocking.

Yes the stimulus helped, but it has not yet fully kicked in as it is a multi year plan. China has been the saving grace so far.

Australia's banks are also amongst the strongest in the world due to a "four pillars" policy built around size and market share.

Australia has had a shortage of housing, which has cushioned the fall on prices, unlike in the US.

Another issue to note is Australians favour variable mortgage rates which when decreased deliver real savings and relief for homeowners.

As we are in a bear market rally (i believe) and i fully expect we will see a recession down the track in 2010.

I will say that over the next two to three months going long AUS $ and Australian mining shares is the way to go until the bear market rally ends.

I expect the ASX 200 to top out around the 4400/4500 area.

A warning sign will be when the Shanghai stock bubble bursts, again, as it no doubt will IMO.

Any sign of a change in US $ trend verse the AUS $ will be negative for the Australian economy.

Australia's commercial real estate is not in good shape (compared to residential), any further downturn will hurt banks severely.

To sum things up Australia goes down harder in a downturn, yet bounces back stronger in an upturn to any economic changes.

Jul 17 01:29 PM

[Dean Morel:]

Maxe Paul has hit the high notes from an Aussie point of view. I agree with most of his comments and really want to get one of his crystal balls or wigi boards so I too can profit from short term predictions.

North American's may find it hard to believe just how good things are in Australia at the moment. "What recession?" is the phrase on everyone's lips.

Our Reserve Bank just made $.5B on currency trading, which is better than a poke in the eye with a sharp stick and way better than selling us into slavery for a few generations like...well let's not go there.

Residential property is still over priced compared to wages. Housing is likely to adjust down at some stage. My guess is when interest rates start going up after inflation kicks in, but that's a lot of if and when.

Despite my ribbing about crystal balls, I too think a second dip in the Australian market is possible, especially if the recession deepens in the US. 50/50 chance.

There are many positives for Australia long term, especially of we can breed and assimilate a bit more.

Jul 17 07:15 PM

[rick12345:]

with a $1 trillion deficit I really wouldn't worry about the the USD having any significant impact on world currencies.
Secondly, Australia's main trading partner is now China (previously Japan) and is still experiencing over 6% growth, while export to the South East Asian region accounts for over 60% of all foreign trade.
I really think that some of you need to focus more closely on the underlying fundamentals of the Australian economy rather than a narrow minded view that consumer driven economies such as Europe and the USA will impact significantly on Australia's trade deficit. Once this global contraction breaks, as it inevitably will, Australia is well positioned to take full advantage of the turnaround in economic prosperity.

Jul 17 07:55 PM

[Dean Morel:]

So rick12345, please do broaden our perspective. Are you saying Australia sells to Asia and that's it, end of story. How is that a broad view?
This is how I simplistically see it, obviously there is a lot more going on. Australia sells raw materials to countries who convert those into goods who sell those to countries who consume those goods. The consuming countries pay for them with debt and their information age services etc, e.g. think of an ipod and who gets what cut of the final price.

Then take a look at global consumption. Yes China and India are increasing, but they are no were near enough big enough to sustain the global engine.

I'll continue to be concerned about North American and European consumption until someone shows me why they are no longer important. Please feel free to do so. My mind is always open, I'm mainly here to learn.

I also don't understand your opening statement, can you explain that. <i>"with a $1 trillion deficit I really wouldn't worry about the the USD having any significant impact on world currencies"</i>

I totally agree that once the contraction breaks, that Australia is well positioned. We are yet to see the final stages of this secular bull in mining.

Jul 17 11:58 PM

[TradingHelp...:]

Long Australia is a good call for the following reasons: China, commodities, agriculture, relative fiscal prudence, population growth.

It is in secular growth. The past year clouded that picture but it is much better place than the US, Europe to tap into China's growth.

Jul 18 05:55 AM

[RiskReturnO...:]

I would long FXA instead of EWA as more pure play on Australia's economic growth. Risk return is much better, especially if coupled with a short FXY pairs trade. For lazier investors, you can simply use DBV as proxy for this trade.

Jul 19 09:27 AM

[trick:]

Agree with the longer-term story fro Australia but right now the main constituents of the Aussie index have been overbought vs my target prices. I.e. resources and banks, but then that seems to be a global theme at the moment. I cannot find a single-country ETF I would buy at the moment, only short. I am comfortable with lending to Australian banks and Telstra though.

Jul 19 05:13 PM

[Tom Lydon:]

Australia will continue to benefit from the strength of China. After all, China is Austalia's biggest trading partner.
www.etftrends.com/2009...

Jul 20 04:21 PM