Australia Stock Rally Shows China Link Waning: Chart of the Day

The nine-year link between Australian and Chinese stocks is breaking down.

The CHART OF THE DAY shows the 120-day correlation between the S&P/ASX 200 Index and Hang Seng China Enterprises Index reached 0.3 last month, the lowest since December 2004, compared with an average of 0.6 over the period. A reading of 1 would indicate the two assets are in lockstep, while zero would represent no relationship.

Investors are speculating Australia’s economy will withstand a slowdown in China, its biggest trading partner, as record-low interest rates boost consumer spending, hiring and house-building amid a drop in mining investment. The price of iron ore, Australia’s largest export, fell 13 percent last quarter as Chinese demand for the steelmaking ingredient waned.

“We are starting to transition away from Australia’s reliance on China,” said Shane Oliver, who helps oversee about $130 billion as Sydney-based head of investment strategy at AMP Capital Investors Ltd. “The Reserve Bank of Australia has taken the brakes off and that’s ultimately led to confidence in a rebalancing of the economy away from mining. We’ve disconnected from the Chinese share market.”

The Australian benchmark gauge has advanced 8.4 percent in the past 12 months and hit the highest level in almost five years in March, while the Chinese measure slumped 7.3 percent. The weighting of materials producers on the S&P/ASX 200 has fallen to 18 percent from 30 percent in June 2008, while financial companies have grown to 45 percent from 33 percent.

Building approvals surged 23 percent in February from a year earlier and employers increased full-time payrolls by the most in more than two decades, according to the statistics bureau. Retail sales posted the biggest jump in almost a year in January. RBA Governor Glenn Stevens left the key interest rate unchanged this week at 2.5 percent and reiterated that borrowing costs were likely to remain steady for a period.

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