The recent slide in the value of the Australian dollar has seen it dipping well below the parity levels of recent years to reach just under 87 cents against the Greenback – down around 8% since its most recent highs of July. We believe the dramatic fall reflects the repatriation of cash by overseas fund managers, as the likelihood of US interest rate rises grows, while the RBA is expected to keep our rates on hold.
With the Aussie dollar trading well above its long-term average for almost a decade now, and with the iron ore price at these depressed levels, we predict the Aussie dollar will trade in the 70 to 80 US cent range for the next couple of years. With the dollar likely to go lower, we are looking for companies with exposure to US earnings. Here I discuss the various sectors and stocks that are set to be winners from the weaker Aussie and discuss some of the broader macro impacts of the stronger American dollar.
The US dollar’s new bull market
Economist and author George Magnus, who is widely credited with predicting the devastating and global economic impact of the US subprime mortgage crisis, recently wrote about what he calls the US dollar’s new bull market.
Magnus points out that with a stronger US dollar the global investment environment is set to change and warns that, as with the last two US dollar bull markets, there could be some “profound shocks”, especially for emerging markets (EM) such as China – the world’s second largest economy and a key trading partner for Australia. He explains that investment in EM assets is already being unwound due to a higher US dollar and borrowing costs and this will “suck liquidity out of the global system” with EM currencies set to fall further.
Sectors and stocks impacted
Currency fluctuations always give rise to both winners and losers. Businesses with an import focus are obvious losers of a strong US dollar. Local retailers are some of the hardest hit as their input costs (such as cotton and manufacturing costs) are paid in US dollars. In my May article for Switzer, I foreshadowed a number of companies that would benefit from a weaker Aussie. These are generally companies with export-focused businesses and those with a significant amount of their earnings coming from offshore such as: News Corporation (ASX: NWS); Brambles (ASX: BXB), QBE Insurance (ASX: QBE) and Resmed (ASX: RMD).
Some more specific examples are:
With a large part of their business in the United States, we expect Aristocrat Leisure (ASX: ALL) will experience significant tailwinds from the lower Australian dollar. Coupled with an increase in market share of competitor Ainsworth (ASX: AGI), a weaker Aussie dollar is a windfall for the company.
Western Australian-based ship builder Austal (ASX: ASB) which earns a majority of its revenue in US dollars, particularly through its relationships with the American government, is another beneficiary of the stronger US dollar.
Suppliers of electronic automotive parts catalogues, Infomedia (ASX: IFM) also has a majority of its earnings in US dollars. The company recently launched a new version of its software, which is proving to be very successful further positioning the business well for the future.
Slater and Gordon
With 50% of its earnings this financial year forecast to come from its UK-based operations, we expect listed law firm Slater and Gordon (ASX: SGH), will see some upside from the weaker Australian dollar.