The Hamilton Capital Global Bank ETF (HBG; TSX) emphasizes the benefits of investing in countries with flexibility in monetary policy – i.e., those with a central bank rate materially above zero. As of month-end, the weighted average central bank rate was over 1.0%, materially higher than that of Canada (50 bps) or the U.S. (~38 bps – i.e., between 25 and 50 bps).
One of those countries is Australia, which represents approximately 7% of HBG. Australian banks have very high capital ratios (materially higher than those of the U.S. and Canadian banks), high returns on capital, and forecast EPS growth in the mid-to-high single digits. Australian banks also have very high/sustainable dividend yields (i.e., over 8%).
Today, the Reserve Bank of Australia (RBA) reduced its primary rate to 1.5%, from 1.75%. All things being equal, a country that can reduce its central bank rate to stimulate GDP growth is in a better positon than those countries with very low (or even negative) rates. Today’s rate cut by the RBA will likely to be stimulative and therefore supportive of forward GDP growth for Australia.
It also highlights the benefits of investing in countries with central bank flexibility, which all things being equal have some monetary defense against unexpected declines in GDP growth and/or financial shocks.
Note: Comments, charts and opinions offered in this commentary are produced by Hamilton Capital and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered is believed to be accurate, but is not guaranteed.