BlackRock’s Australia ETF saw outflows last week through a combination of investor profit-taking and fears surrounding Australia’s strained diplomatic relationship with China.

According to data from Ultumus, the iShares MSCI Australia UCITS ETF (SAUS) saw $163m outflows in the week to 7 May taking its assets under management (AUM) to $441m.

The withdrawals coincide with China’s recent decision to suspend the China-Australia Strategic Economic Dialogue, following what China’s National Development and Reform Commission described as the Australian government’s “Cold War mindset”. 

The relationship between the two powers was already fraught with Australia launching an investigation the origins of the COVID-19 virus and banning Huawei from building its 5G network, and China imposing sanctions on Australian wine and beef exports.

Previously, China had informally halted ministerial-level communication with Australia but it was understood day-to-day economic interactions would remain unaffected. 

This latest antagonism appears to come in response to Australia’s decision to cancel two deals China made with the state of Victoria as part of the Belt and Road Initiative.

It also follows the Australian government’s security consultation over the port of Darwin, with the idea being floated that the current leaseholder – Chinese company, Landbridge – could be forced to divest for national security reasons.

China accounts for 29% of Australia’s international trading activity, according to the country’s Department of Foreign Affairs and Trade. With Chinese investment in Australia falling by 61% in 2020, to its lowest level in six years, it appears the pair are on an embedded trajectory of friction, with ideological differences likely to prove a difficult tension to reconcile.  

Another cause for investors to exit Australia exposures, such as SAUS, is a simple case of profit-taking.  

In April, the Australian economy was given a boost by a raft of positive announcements. Consumer confidence in economic activity hit an 11-year high, all 900,000 jobs lost to pandemic had been recovered and economists’ 2021 growth forecasts rose from 3.5% to 4.4%, according to a survey by Reuters. 

These updates and considerable government stimulus capped off a bright start to the year for Australian economy trackers with SAUS up 10.6% as at 12 May but likely front-ended some of the economic recovery’s expected upside – prompting profit-taking.

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