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Australia Stocks: Under Pressure Down Under

Australia’s central bank made waves this morning by cutting key interest rates to record lows. But while Australia was a reasonably safe place to hide out during the depths of the economic downturn, and while this rate cut might be a short-term bullish sign, traders invested down under might want to be looking elsewhere right now.

Yes, Australia’s benchmark stock index, the ASX 200, just hit its highest level since the middle of 2008 … but the data behind the rally is unpleasant.

Consider that mega-miner Rio Tinto (NYSE:RIOhas slated even more job cuts for Australia operations as part of its 2012 plan to cut $5 billion in costs from the company. Soft demand for aluminum and energy, among other things, have really made things difficult for RIO in the last few years.

Also consider that the ink wasn’t even dry on the Glencore Xstrata deal before the CEO of the newly merged materials company announced it would be trimming redundancies created by the marriage.

Mining is a crucial industry in Australia, worth more than 10% of the nation’s GDP, and this kind of cost-cutting and consolidation is not a bullish sign.

There are hints that the rough road for mining and materials is starting to hit Aussie consumers, too.

Australia retail sales fell 0.4% in March, much worse than expectations of a 0.1% improvement and the first decline of 2013. Also worth noting is that the housing market remains soft there, according to a key building products supplier, Boral Ltd (PINK:BOALY), and there are hints the housing firm might engage in layoffs soon, too.

Last but not least, the number of Australian job ads fell in April at a faster pace than March — not a good sign as unemployment hits a three-year high in the nation.

Australia is one of the regions that stood as a model of resilience amid the global economic downturn. Sure, things got rocky there during the financial crisis in 2008, but Australia never met the technical definition of recession — that is, two consecutive quarters of negative GDP growth.

The biggest reason was a one-two punch that involved a strong trade relationship with nearby China and land rich in the natural resources China needs, including coal and iron ore. But now, a soft commodities market that has gutted prices for materials and the continued risk of a slowdown in China are holding back Australia’s economy.

Of course, it’s worth noting that investors have been able to make a pretty penny down under lately even as signs of trouble have cropped up. The iShares MSCI Australia Index Fund ETF (NYSE:EWA) has outperformed the S&P 500 in the past 12 months thanks in large part to a strong Australian financial sector. Major banks Westpac Financial (NYSE:WBK) and the Commonwealth Bank of Australia (PINK:CBAUF) are both up 45% and 30% in the past 12 months, respectively, and are among the top holdings in the iShares Australia ETF.

This is in part because of optimism over monetary policy that would juice financials and the Aussie economy much like QE has in America. The Reserve Bank of Australia followed through again today, reducing its benchmark interest rate today to a record-low 2.75%. Like American financial stocks that benefited from loose monetary policy, there could be a nice tailwind for the sector to offset a soft domestic economy.

But the data remains bleak. And it’s hasn’t been all sunny skies for non-financials in Australia. Consider BHP Billiton (NYSE:BHP), a diversified mining and materials stock and one of the largest equities headquartered in Australia, is down more than 13% year-to-date.

It has been more than 20 years since Australia last suffered a textbook recession, and the recent central bank action might keep the Aussie economy moving.

However, it remains unlikely that there is much more upside in these picks given the current slowdown and the already high levels of Australian equities.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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