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Australian ETF (EWA) Gets Boost from BHP-Rio Clearance

By Carl Delfeld of Chartwell ETF and ETFfolio

The Australian market and the ETF that tracks it (EWA) got a nice boost as the BHP-Rio merger passed a major regulatory hurdle. EWA bucked a down trend today up about 1% in early trading this morning.

The FT reports that Australian regulators approved BHP Billiton’s proposed takeover of Rio Tinto yesterday.
Banks and financial service companies were some of the best performers as markets bounced back from more than a week of losses on hopes US Congress would approve a revised plan this week to rescue banks and invigorate stagnant credit markets. Australia's top four banks make up about 20% of the total value of the Australian market.

BHP Billiton, the world’s biggest miner, rose 5.7% to A$32.75 and Rio Tinto jumped 12.4% to A$95 after gaining clearance from the Australian Competition and Consumer Commission. Analysts said the final serious regulatory hurdle would be the decision of the European Commission, due on January 15.

Investors will need to monitor China's slowing growth which will impact Australian exports. Some predict that Chinese GDP will slow from its recent 11-12% to the 7-8% level.

Rate Cut Not Helpful to Australian ETF (EWA)

Carl Delfeld of Chartwell ETF & ETFfolio

The first rate cut in seven years by Australia's central bank yesterday has not helped the iShares MSCI Australian ETF (EWA) which is down 2% in afternoon trading.

After cutting the official rate from 7.25% to 7%, the Reserve Bank of Australia said that tight financial conditions together with higher fuel costs and lower asset values had "exerted the needed restraint on demand".

Peter Smith of the Financial Times notes that a series of recent indicators has suggested the Australian economy is in much better health than expected. Until late last month, many economists had predicted a further four rate cuts within the next seven months.

Resource-oriented exports were up sharply leading to an unexpected big improvement in Australia's current account balance, with the quarterly deficit dropping from A$20bn at the end of March to A$12.8bn.

Weighing the market down today is perhaps the news that the two largest holdings in the ETF basket, Rio Tinto and BHP Billiton, were affected by the suspension of the review of their proposed $130 billion merger by European regulators. On the positive side, Bloomberg reports that Australia's four biggest banks, which account for 20% of the market's value, would pass on the lower rates to consumers staggering under housing prices at a 22 year high.

Australian ETF Hits Turbulence

By Carl Delfeld of Chartwell ETF and ETF Pick of the Week

The Australian consumer does not look that robust. The Financial Times reports that household debt-to-income ratios, at 177%, are higher than in the US, according to Morgan Stanley. And homes are every bit as over-valued as elsewhere, if not more so: the average house price/income ratio is 5.5 times.

The top holding of the Australian ETF (EWA) BHP Billiton reported its sixth consecutive year of profits growth after the Anglo-Australian mining group due to sizable profits from its petroleum, iron ore, manganese, and copper operations. But increasingly, the market is becoming skeptical that the giant merger between BHP and Rio Tinto will not take place.

But Australia’s inflation rate recorded its biggest quarterly increase in 17 years as consumers were somewhat squeezed by increasing mortgage rates and record fuel prices. Its economy, though showing some signs of slowing, continues to enjoy consistent growth and is in its 17th year of continuous growth.

On the cautionary side, mortgage credit will expand by less than 10% for the first time in 40 years in 2008 according to Citigroup. The Australian stock market is down by 26% since its peak in November. Banks have been hit harder still and the top four banks account for 20% of the total Australian market value. The Australian currency is also trading at a four month low as many expect lower interest rates.

Aussie ETF (EWA), Rio Tinto & Banks

By Carl Delfeld of the Chartwell ETF Advisor

The Australian exchange-traded fund (EWA), a steady performer over the past few years, has been a bit topsy turvey during the last quarter. Normally, one would think that the trouble lies with its top holdings which are oriented to energy and commodities: the titans BHP Billiton and Rio Tinto.

Last year, BHP made an all-share bid for Rio which was pushed aside as too low and cash poor. Within the next week, BHP will have to make a decision, sweeten the deal or walk away for six months. It seems doubtful market conditions would improve by then. Given it is an all-share deal, the split of value would not change if share prices fell further and BHP could always alter the exchange ratio.

Despite this, according to the Financial Times, the market still thinks BHP will improve its terms. Rio’s shares are trading 7% cent above the proposed offer and its market capitalisation jumped by $20bn on news of BHP’s approach. Since the offer its shares have outperformed the global sector by 20 per cent.

Rio is off 4% this morning but was up strongly last week. Its share price is up 47% over the last 52 weeks but is trading at a level 28% off its year high. EWA is off 1.9% in early morning trading.

The reality is that for both sides the deal makes even more sense in a bear market than it does in a boom. Pricing power would be improved.

Actually, the problem with the Aussie ETF performance has been the financial sector which represents just under 50% of the ETF holdings, and in particular, its four dominate banks which make up collectively 20% of the exchanges market capitalization. The new government is promoting more competition and has heightened the scrutiny of bank operations. Interloper Bank of the West is also picking up market share using lower pricing as a wedge and the markets fear that overall margins are declining.

Find out how to position Australia in your global ETF portfolio by joining Chartwell ETF.

Australian Growth, Interest Rates and Currency Stay Firm

By Carl Delfeld of the Chartwell ETF Advisor and Chartwell Partners Wealth Management

Data shows that the Australian economy remains robust with labor shortages pointing to higher interest rates down the road. This shoild also firm up the Aussie dollar helping returns of the Australian exchange-traded fund (EWA).
Australia’s already low unemployment fell further, to 4.3 per cent in December, down from 4.5 per cent the previous month, and only slightly ahead of September’s 33-year-low of 4.2 per cent according to the an article by Virginia Marsh of the Financial Times.

The stronger-than-expected data came just two days after Kevin Rudd, Australia’s new prime minister, made a high profile visit to the Reserve Bank. Since he hammered Mr. Howard during the campaign on the interest rate issue, higher rates so soon after coming to power must be a tad uncomfortable.

“We are engaged in a national war against inflation,” Mr Rudd said on Thursday after announcing funding for 20,000 training places in mining, construction, health, community services and other sectors facing the most acute skill shortages. Economists are expecting next week’s data to show core inflation of 3.3 per cent for last year, ahead of the 2-3 per cent band target. Many economists believe there was little prospect of an imminent cut in New Zealand’s rates, the highest in the industrialised world at 8.25 per cent.

The Australian ETF (EWA), while down so far in 2008, was up 3.7% in trading this morning. For more on investing in Australia and ETFs, go to Chartwell ETF.