EWA: Banking on Australia’s Strength

It comes as a surprise to some that an established stock market like Australia has more than doubled in the last 4 years. Gains of that nature often lead people to think of emerging regions.

Unquestionably, "Down Under" investors of the iShares MSCI Australia Index (EWA) have had plenty to be grateful for. Yet, the upward momentum seems to have slowed a bit in the last 8 weeks.

Has EWA finally run out of steam? Probably not. My sense is that Australia will still deliver the goods… and here’s why.

Australia

Global economic growth is still expanding. (This is part of the reason for rate increases worldwide.) The global expansion requires exporters/suppliers of materials and/or industrial products. Nearly 30% of the Australian companies in the iShares MSCI Australia Index (EWA) are involved in the processing of materials and/or industrial products.

There are a few concerns that shouldn’t be overlooked, however. For instance:

1. A whopping 40%+ of EWA are financial companies. Financials in the U.S. represent the worst performing segment of the U.S. economy due to lending woes and rising interest rates. While Australia is not suffering from a housing crisis at this time, its main bank does see the possibility for increasing its own interest rates to combat inflation. This could certainly tame EWA.

2. The average volume for the iShares MSCI Australia Index (EWA) has jumped to 1,000,000 shares in 2007. it was half that amount in 2006. What might this mean? It could mean that excessive optimism is building on the upside as more investors jump into the Australian waters. But if the waters should become infested with Great Whites, people might want to get out just as quickly. Drops could be dramatic. (This is why I always recommend the use of stop-losses.)

3. Fundamentally, the price-to-earnings ratio of large Aussie companies has roughly risen 20% in the last year. The iShares web site has EWA with a P/E of 20 as of 5/31/07, significantly higher than the historical average. Is the higher p/e (multiple) justified… or is it now "over-valued?"

Again, I still favor a little Australia in the mix. The iShares MSCI Australia Index (EWA) delivers an impressive annual yield of 4% for the risk we take. Once again, while I still advocate Australian exposure, I also use stop-losses to protect gains and/or minimize losses. You should do the same.

Disclosure Statement:  As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above. 

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