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Monday July 09, 2012
Australia: Bet on commodities
by Marvin Appel, editor Systems & Forecasts Real government bond yields in Australia far exceeded real yields in other major bond markets around the world. High real interest rates also represent a favorable investment climate for Australian equities. The immediate attraction on the iShares MSCI Australia Index ETF (EWA) is a yield 4.6%. Another attraction is that the sector mix of Australia’s stock market is very different from that of the S&P 500 Index, making EWA a vehicle for portfolio diversification. History shows that during most of the time when commodity prices were rising, EWA outperformed the S&P 500 Index. Similarly, most of the time that commodity prices were in decline, EWA lagged the S&P 500. The implication is that EWA is an indirect bet on the direction of commodity prices, albeit a bet that pays a healthy dividend while you wait. If you expect commodities to continue the correction that began fifteen months ago then any investment in Australia (stocks or bonds) would be a bad bet. However, I do not expect weakness in commodity prices to continue. Central banks around the world are stoking inflation in order to prop up the worlds’ economies. Downside price risk for EWA should be $20.50, which would be a good bottom fishing area. The intermediate-term upside objective is $24/ share. In our view, this is a good long-term holding for 5% of your equity portfolio, and should be purchased below $22/share. Learn more about this financial newsletter at Marvin Appel's Systems & Forecasts. Related articles: 
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