Sunday, 3 November 2013

Investing in the Australian ASX

So, this holiday I was asked to do an economic snapshot and investment outlook for 4 countries in the EFA, with a view to tracking each country's main stock index via an ETF. So, here's my work for Australia:
Australian Economy & Equity Investment
Population (2012)
22.68 million
Australian Dollar (AUD)
2012 GDP
US $1.57 trillion
2012 GDP Growth
IMF GDP Growth Prediction for 2014
2.8%  (2.5% predicted for 2013)
5.6% (March 2013)
1.6% (March 2012)                                                    1.3% in 2013 Q3 – up from 04.% in Q2
Budget Deficit/Surplus
Negative $12.3 bn
Currency Rate
AUD/USD 0.95
IMF CPI Growth Prediction for 2014
2.5%  (2.2% for 2013)
Main Sectors of Economy
Services - 68%  Mining (including “mining related economy”) 19%
Main Exports
Unprocessed resources
Agricultural goods
Main Export Partners
China 29.5%
Japan 19.3%
South Korea 8%
Main Imports
Crude Oil & petroleum products
Main Import Partners
China  18.2%
USA  11.6%
Japan   7.8%
Main Stock Exchange
Market Cap
(January 2013) A$1.4 trillion
Market Performance YTD

Australian Exports

·         Australia is the world’s biggest producer of: Bauxite/Aluminium, Opal;
2nd biggest of: Nickel, Gold, Zinc
3rd biggest of: Iron Ore, Diamonds, Natural Gas – predicted to become the world leader of LNG production by 2020
·         Gold has gained 6% in the last fortnight with signs that the Fed won’t taper QE anytime soon. Currently $1350/oz. Good for Australia as it costs most of their mines $1000 approx. to produce 1 oz.
·         Australia exports predominantly unprocessed raw materials into Asia for manufacture

·         Australia is the third largest consumer of petroleum in the world and imports over 50% of its crude oil/petroleum and will produce less than 20% of its needs by 2020. It also gets over 80% of its crude imports from the Middle East via Singapore, and is the only country in the IEA that doesn’t stockpile 90 days’ worth of crude oil. With its isolation, continental size and reliance on transport fuels, Australia is very vulnerable to crude oil price increases caused by instability in the Middle East.

·         Chinese Slowdown A slowdown in the Chinese economy would have a huge effect on the Australian economy, especially for the mining and commodity sectors. The IMF diagram below shows that a slowdown in Chinese demand could cause Australian GDP to decrease by over 3%. This makes the ASX particularly vulnerable as many of the biggest companies in it are commodity/mining companies.

·         Another issue for Australia is the threat of a gold & commodity price drop without a fall in the value of the AUD. If gold were to trade down below $1000 oz for a sustained period as long as inflation increases and the value of AUD falls, the real cost price of production of all commodities falls & cushions the mining sector. The Reserve Bank of Australia has created a strong AUD recently with high interest rates, so a drop in commodity prices could severely affect the economy.

·         The 5 biggest companies on the ASX are: BHP Billiton (BHP) – largest mining company in the world as of 2011; Commonwealth Bank (CBA) – Banking; Rio Tinto (RIO) – metals & mining; Westpac (WBC) – Banking; Australia and New Zealand Banking Group (ANZ) Banking. The top 10 shows a very similar pattern of commodity and banking companies.
·         The ASX experienced drop in 2008 along with other countries, but had experienced less of bubble growth, so didn’t fall anywhere near as much as the FTSE. The ASX generally has had a less pronounced boom & bust cycle.

The Vanguard Australian Shares Index ETF is a physical ETF & attempts to track the ASX. Their 10 biggest holdings are in the companies above, plus a few others such as Westfarmers, and make up over half of the company’s holdings. High exposure to the services sector in particular

Although not very diverse, tracking the ASX is a relatively safe & defensive option; the Australian economy has historically experienced higher GDP growth than the world average  and has been less volatile than other developed countries’ – it’s commodity exports have enjoyed generally increasing demand from developing countries so reduce the impacts of crashes in its large financial sector. E.g. In a bad time for the financial sector, the gold mining sector experiences high demand & vice versa.

My Outlook
In regards to Australia, I would be bullish towards an ETF tracking the ASX. As today it has been confirmed that Syria has destroyed its chemical weapons facilities, it seems the prospect of turbulence in the Middle East & a following Australian oil shortage is receding. There’s been some decline in gold and metal prices prompted by signs of general recovery and a more positive than expected tone of the Fed’s announcement today, a possible Chinese slowdown could also see demand for Australia’s fuel resources lessen. Falling commodity prices will also pull down the AUD, which, in moderation, should counteract a slowdown by increasing competitiveness of Australian exports.  As other European countries come out of recession and the US debt ceiling situation is averted, demand for Chinese goods and thus Australian resources will increase too. Finally, strong growth of the ASX so far could be signal the start of a more bullish period for stocks which bodes well for ETFs tracking the ASX.

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