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Investors Are Searching For Yield In Australia (Part 5 of 5) (Continued from Part 4) One interesting example of the search for yield is evidenced in the recent rebound in Australian equities. We had been negative on this market since last January and, indeed, Australian stocks had trailed global equities by roughly 6% since that time. More recently, however, Australia’s market has been rebounding, despite low commodity prices and the struggles of mining companies. Why? One reason may be interest in Australian banks, which have been paying high dividends. The Australian equity market now offers a dividend yield of over 4%, more than double that of the U.S. market. With yields low around the world, investors are increasingly scouring the globe for income. That’s one reason we would upgrade our view on Australian equities to a benchmark weight.
Market Realist – Income-strapped investors are looking to Australian equities for income.
Recently, Australian equities climbed to seven-year highs when the RBA (Reserve Bank of Australia) cut rates to a record low of 2.25% in early February. Australian equities suffered headwinds last week. The RBA decided to keep rates at 2.25%. Analysts were expecting another rate cut. The previous graph shows the year-to-date, or YTD, performance of the iShares MSCI Australia ETF (EWA).
Another tailwind supporting Australian equities is the high dividend yielding financial sector stocks. Cash-strapped investors are looking to banking stocks to supplement their incomes. In such a scenario, EWA could be a good way to play Australian equities—given its 53% weight to the Australian financial sector. The previous graph shows EWA’s holdings by sector.
Bond yields continue to stay low in all parts of the world. Investors looking for income should look to equities to supplement yields. The US mature technology sector (XLK) continues to look good. It could be a good investment option given its robust earnings and revenue growth. Bond market proxies, like utilities (XLU), should be avoided. Historically, they have been negatively impacted by a hike in interest rates. Going beyond US equities (SPY), Europe (EZU) could be a good value play. The headwinds, in the form of Greece and Ukraine, settled down. Also, the recent economic data looks positive.
Read Why sectors are now on shaky ground to understand what areas you could avoid and where you could find opportunities in the US equities sector.
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. Ishare MSCI Australia is listed in United States of America. Its market capitalisation is US$ 2.0 billions as of today (€ 1.9 billions). Its stock quote reached its highest recent level on November 02, 2007 at US$ 34.83, and its lowest recent point on March 13, 2009 at US$ 10.50. Ishare MSCI Australia has 85 200 000 shares outstanding. |