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As ETF Soars, Australia Retains AAA Credit Rating

March 16, 2016 2:32 pm
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As ETF Soars, Australia Retains AAA Credit Rating

As is already known, commodities prices are kind of a big deal to Australia and the iShares MSCI Australia ETF (NYSE: EWA), though the largest Australia exchange traded fund allocates just over 17 percent of its combined weight to materials and energy stocks.

That is enough to explain, in part, why EWA is higher by 12.6 percent over the past month. And there is more good news: Although its interest rates and dollar have steadily been declining, Australia retains its AAA credit rating. At least in the eyes of Fitch Ratings, which recently reaffirmed Australia, the world's 12th-largest economy at AAA. 

“Australia's 'AAA' rating is underpinned by the economy's high income, strong institutions and effective governance. The free-floating exchange rate, credible monetary policy framework, low public debt and growing recognition of the Australian dollar as a reserve currency allow the economy to adjust to changing economic conditions,” said Fitch.

An AAA rating is nothing to scoff at. Just as Finland, which recently saw Fitch pull its AAA rating. Including Australia, Fitch rates just 12 countries and the European Union AAA. That group also includes Germany, Switzerland and the U.S.

Several years ago, Australian stocks and the corresponding exchange-traded funds were hot commodities. The country had some of the highest interest rates in the developed markets, boosting the allure of its dollar for carry trade, while luring some international investors looking for dividend yields that were noticeably higher than in other developed markets.

Even with record low interest rates of two percent, Australia's dividend yields are among the highest in the developed world, something that is on display with EWA. On a trailing 12-month basis, EWA yields 6 percent. To put that in perspective, combined the S&P 500 and Dow Jones Industrial Average do not even yield 5 percent.

Australia's dividend story has been pinched bit by negative actions out of the materials space, but financial services, a sector that accounts for nearly 53 percent of EWA's weight, is expected to continue growing dividends.

“The Australian banking system is one of the strongest globally on a standalone basis, based on Fitch's Banking System Indicator (BSI) scoring mechanism. Fitch expects banking sector balance sheets to continue strengthening, with solid capitalisation and recently tightened underwriting standards offsetting slower profit growth and modest asset-quality pressures,” adds Fitch.

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