Australia ETFs: What Recession?

It may surprise some to learn that one developed nation may actually have avoided a recession altogether. The Economist poll on GDP (expansion versus contraction) shows that Australia may finish 2009 with positive growth (0.5%).

Anecdotally speaking, many Australians report that housing prices have stabilized and that jobs are plentiful. (Note: The August unemployment rate was 5.8%. However, there’s a fair amount of government debate on whether unemployment will begin to level out or whether it will climb to 7% or higher!)

That said, if you even talk about a recovery to Australians, they may wonder what all the fuss is about. After all, the ”football squad” already qualified for the World Cup in 2010.

Ohhhh… the investment markets. Riiggggggggghhht.

Indeed, Australian stocks were beaten like a rugby player’s nose in 2008; still, the iShares MSCI Australia Index Fund (EWA) has already recovered post-Lehman losses as of 9/30/2009.

Unfortunately (or fortunately), the most popular Australian-based ETF is heavily skewed towards 2 sectors: 30% financials, 30% materials. If you hold iShares Australia (EWA), you need to be mindful of your exposure to highly correlated funds such as Global Materials (MXI) and South Africa (EZA).

There’s little doubt about Australia’s resilience. Its Central Bank is already looking ahead to raising interest rates. (Imagine that!) And its dollar has risen sharply against the U.S. greenback. The CurrencyShares Australia Dollar (FXA) picked up 21% in 2009 alone.

Although I’m a fan of what Australia can do for investors… and the Currency Shares Australia Dollar (FXA) has played a part in many client portfolios… I also recognize the Aussie dollar’s role in the currency carry trade. Investors need to be careful of an unwinding of the carry trade, whether they have chosen the stock ETF (EWA) or the currency ETF (FXA).

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.