Tales of the Australian dollar

Tales of the Australian dollar

In recent years, a steadily climbing Australian dollar has been a significant headwind for a number of businesses in Australia, hindering their annual growth rates. This trend has now reversed, meaning that the earnings effect has switched – and we are keenly watching.

If commodity prices continue their recent decline, and the RBA cuts cash rates further, an A$ to US$0.85 exchange rate is a distinct possibility.

Exporters and companies with offshore earnings will benefit from the lower Australian dollar, including QBE, Worley Parsons, Amcor, Treasury Wine Estates, Brambles, Aristocrat Leisure, Adelaide Brighton, Resmed, Sonic Healthcare, Cochlear, Orica Limited, Select Harvests Limited, Henderson Group, Magellan Financial Group, Platinum Investment Management, CSL, Computershare, James Hardie, Incitec Pivot Limited, Westfield Group, GWA, News Corporation and Ainsworth Gaming.

But ask a range of experts and everyone has a different view. Banks, for example, are forecasting the Aussie dollar to be around US$0.98 cents longer-term. Many sell-side analysts have US$1.00 and others have US$0.70 as their target. Where it actually goes is anybody’s guess – 2 out of 30 economists will be eventually be proven right.

Naturally, this theme has been discussed at length in Investment Committee meetings at Montgomery Investment Management, and a high proportion of our portfolio is invested in businesses that stand to benefit from the lower Australian Dollar.

$1 of earnings x weeks ago was worth x. Today that same US$1.00 is worth xy, and at US$0.85 it is worth xyx. This is obviously too simplistic given the impact from businesses with currency hedges and various costs and assets structures. Nonetheless, every US dollar earned will increase profits when translated into Australian dollars at present levels, and if our currency continues to trend lower this will boost reported results in coming financial periods with little to no extra effort on the company’s part.

It’s a similar scenario for resource businesses, which, as our Head of Research Tim Kelly pointed out here, may not really a beneficiary of a falling AUD/USD, given that resource sector performance has historically been highly correlated with the AUD/USD.

It’s also worth considering that a lower Australian dollar will be a negative for retailers and importers. Given that they purchase their goods from overseas, increased costs will either have to be absorbed into their own margins, or passed on to their suppliers – or customers.

We are watching with interest, and are eager to see what happens in the Fiscal Year 2013 reporting season.