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Since hitting a low of just under 58 US cents in late March, the aussie dollar has surged to around 72 US cents. Driving the rise has been a weakening in the US dollar, as investors fear a debasing of the currency as the US Federal Reserve and US Government act to provide support to the US economy. In the first nine months of fiscal 2020, the US Government budget deficit ballooned to US$2.7 trillion.
The aussie dollar has also risen because Australia was seen to have handled the Coronavirus pandemic better than many other countries. Strong support for commodities, particularly iron ore and more recently precious metals such as gold, has also leant support.
Some economists see this trend as continuing. The other week, National Australia Bank lifted its forecast for the dollar from 75 US cents to 80 US cents by mid 2022, saying that it expected it to be at 74 US cents by year’s end. Michael Knox, the Chief Economist at Morgans, cited the ever growing US Government budget deficit and the parallel to the post GFC environment when speaking on Switzer TV: “I would be very surprised if it didn’t hit 80 US cents”.
If the aussie dollar keeps climbing, this could impact the Australian dollar earnings of a number of our major companies. Most companies do not hedge their exposures because currency hedging is costly and imperfect, they have “natural” hedges that mitigate the risk, or they appeal to international investors and although domiciled on the ASX, they report their earnings in US dollars.
But for Australian resident investors, a rising currency can have a big impact on earnings and valuation. And while this may not lead to a ‘trashing”, it will exert downward force on their Australian dollar share price. Here is a run-down on the stocks and sectors that could be impacted.
Our healthcare majors are globally diversified companies. The largest, CSL, only earns 8% of its revenue in Australia, with 55% generated in the USA and 37% from Europe and the rest of the world. For Resmed, the US share it is even higher, with 64% of revenue coming from the Americas.
They obviously have US costs and US borrowings to service, which provide somewhat of a natural hedge, but the exposure is still quite material. They report their earnings in US dollars and a second measure called “constant currency”, which eliminates foreign exchange movements from one year to the next.
But for Australian shareholders looking at an Australian dollar share price and Australian dollar dividends, these will be impacted if the aussie dollar appreciates.
The other three companies, Cochlear, Sonic and Ramsay, report their earnings in Australian dollars. Cochlear is most exposed with over 83% of revenue coming from outside of Australia, Sonic is next at about 65% and Ramsay is around 50%. For Ramsay, the currency risk is chiefly to the euro and the pound, rather than the US dollar. While the aussie dollar has also appreciated against the euro, it is less in percentage terms because the euro (and most major currencies) have appreciated against the US dollar.
Resource majors BHP and Rio also report in US dollars. They are more sensitive to changes in commodity prices rather than changes in foreign exchange rates because commodities are quoted in US dollars and prices tend to go up when the US dollar weakens, and decrease when the US dollar rises.
But there can still be an impact for Australian shareholders, in part because their Australian costs are higher in US dollars and due to the translation from one currency to the other. For example, Rio declared a higher interim dividend of US 155c per share for its first half ending 30/6/20, up 3% on FY19. However for Australian shareholders, the dividend in AUD falls by a little over 2%.
Woodside, Oil Search and Santos report in US dollars, while Origin reports in Australian dollars. All are impacted to by the price of oil and LNG (again, these are quoted in US dollars), and all carry a disproportionate share of Australian dollar costs. A higher Australian dollar will impact returns for Australian shareholders.
Similar to the energy majors, the Australian gold producers manage an Australian dollar cost base and a US dollar revenue stream. While a stronger Australian dollar is more of a negative than a positive, the offsetting relationship between the price of gold and the US dollar (that is, gold typically increases in price when the US dollar weakens, and decreases in price when the US dollar strengthens) tends to mitigate this risk.
Packaging giant Amcor now has its primary listing in the US and reports in US dollars. Asia Pacific revenue (which includes Australia) is less than 13% of total revenue. Amcor uses forward FX contracts to manage some of its currency risk.
James Hardie also reports in US dollars, with US sales accounting for about 65% of revenue. BlueScope reports in Australian dollars.
No material impact on the major banks. Macquarie is the exception, with about 50% of revenue coming outside Australia (Asia and the US). On the insurance side, a possible headwind for QBE.
Most consumer discretionary stocks are domestically focussed and not materially impacted by foreign exchange movements. One company who is increasingly earning revenue offshore is gaming technology leader, Aristocrat Leisure. Casino operators Crown and Star Entertainment could also be potentially impacted in the medium term if a higher Australian dollar makes Australian casinos a less attractive proposition to international visitors.
With the exception of Treasury Wine Estates (TWE), unlikely to be materially impacted. If the aussie gains against the Renminbi, could cause a little pain to A2Milk and Blackmores.
With the provision and sale of software typically a global business, a higher Australian dollar will cause headwinds for companies such as WiseTech Global, Altium, Appen and Xero. Altium reports in US dollars.
Payment company Aftterpay, which is expanding rapidly in the USA, could also be impacted.
Global stock transfer and registry provider Computershare, which generates 90% of its revenue outside Australia and New Zealand, reports in US dollars and measures.
performance on a constant currency basis.
Limited or no impact on Australian focussed REITs (real estate investment trusts). Internationally facing real estate companies, such as Lend Lease and Unibail-Rodamco-Westfield will be impacted. The latter is more exposed to the AUD/EURO, where any appreciation may be more measured.
Limited or no impact.
Listed investment companies, managed funds and index tracking exchange traded funds specialising in international shares or bonds will see their returns dampened if the aussie dollar continues to rise.
Some managers offer currency hedged versions. For example, an alternative to IVV (the ASX exchange traded fund that tracks the US S&P 500 index) is IHVV, which is currency hedged. Active fund manager Magellan offers a currency hedged version of Magellan Global Equities (MGE), which trades on the ASX under code MHG.
Are there any winners from a higher currency? Aussie consumers are winners (because they have more buying power), and so are companies that import goods from overseas. Because they can buy goods cheaper, they can potentially look to increase sales volumes or in some circumstances, profit margins.
In the listed company environment, discretionary retailers of electronic goods, furniture, homewares and appliances, such as JB Hi-Fi, Harvey Norman, Nick Scali, kogan.com and maybe even Wesfarmers (with Bunnings, Kmart, Target and Officeworks) could potentially be winners. Auto dealer Eagers Automotive Limited could also benefit from a higher currency.