Australian Prime Minister Kevin Rudd, who swept into power in 2007 as a fresh alternative to a long-ruling coalition of center-right parties, is on the verge of being swept out of his own party. The Chinese-speaking former diplomat has has called for a ballot on Thursday for leadership of the governing Labor Party, with the premiership going to the winner. Rudd’s has seen his leadership challenged by Deputy Prime Minister Julia Gillard, who is backed by both conservative members of Labor Party and several more liberal politicians.
Rudd’s decline in popularity has been partially tied to a controversial plan to impose a “super tax” on mining profits [see Will Resource Tax Sink Australia ETF?]. “The tax, which the government thought would win popular support by spreading the wealth from the booming mining sector, has instead backfired as the public worries it will damage Australia’s credibility as an investment destination,” writes Rachel Pannett. “Mining giants BHP Billiton Ltd. and Rio Tinto Ltd. warned that billions of dollars worth of investment are at risk, and they have led a fight against the 40% levy, saying it would make Australia one of the highest-taxed jurisdictions in the world.”
Mining exports are a critical component of Australia’s economy, and strong raw materials demand from China in recent years has allowed the country to come through the recent recession in much better shape than most developed economies. Australia became the first developed market to raise interest rates, a scenario that is still months (and perhaps years) away for the U.S. and euro zone.
Because the two candidates in the hastily-called election belong to the same political party, many expect the impact on the country’s economy to be minimal. But others note that Australian markets could rally if Gillard is able to knock Rudd from his post, as she would be likely to consider dropping the push for the new mining tax that has weighed heavily on the country’s stock markets. Whereas Rudd has refused to budge on the issue, Gillard would have the flexibility to reverse her position without losing credibility with her party or Australian voters.
Australia ETFs In Focus
For investors looking to establish exposure–either long or short–to Australia’s equity markets, there are two pure play ETF options available. Although both of the funds profiled below invest in Australian stocks, the risk profiles and sector breakdowns offered up are very unique [for more investment ideas, sign up for our free ETF newsletter]:
- iShares MSCI Australia Index Fund (EWA): This ETF tracks the performance of the MSCI Australia Index, a benchmark comprised of the largest and most liquid Australian equities. Among EWA’s largest holdings are mining giants BHP Billiton (14% of assets) and Rio Tinto (3% of assets), two companies that would no doubt get a boost from a reversal on the mining tax plan. In aggregate, EWA has a heavy tilt towards the financial sector, which makes up about 45% of assets; industrial materials (24%) and consumer services (9%) receive the next largest allocations.
- IndexIQ Australia Small Cap ETF (KROO): This ETF tracks the performance of the IQ Australia Small Cap Index. Unlike EWA, which is made up of giant and large cap companies, the cleverly-named KROO focuses on small cap stocks. Whereas EWA’s components tend to generate earnings from around the world, KROO’s holdings are more dependent on the local economy. From a sector perspective, the breakdown is drastically different; financials account for only about 10% of KROO (as opposed to 45% of EWA). The largest allocations are to industrial materials (27%) and consumer services (12%).
Disclosure: No positions at time of writing.