- Investment strategies
- Why invest in the stock market?
- Buy and hold or technical analysis? Why you need an investment plan
- Value investing and short selling in volatile markets
- Using technical analysis to support value investing
- Investing in the unexpected
- Franking credits, explained
- What is dividend stripping and is it a sensible strategy?
- Investing in quality IPOs
- How to invest in stocks that benefit from a moving Australian dollar
- Reasons to avoid bonds when interest rates are low
- How value investors use Skaffold
- Quality, growth and value = a winning strategy
- Know your investor type and boost your performance
- Technical + fundamental analysis = better buy and sell decisions
- Fundamental investing
- Value investing and the price earnings ratio
- Intrinsic valuation models and methodology
- Value investments or value traps?
- How to find value stocks in a bull market
- Find value investments in expanding markets
- Why capital raisings struggle to add investment value
- How to value an insurance company
- Top stocks
- 5 qualities of top stocks
- How to find stocks with a competitive advantage
- Why return on equity is the best measure of business performance
- Using cash flow to find value investments
- Finding high quality dividend stocks
- Debt is not always a dirty word
- Why Skaffold share investment software makes sense
- Using economic factors to uncover the best investment options
- How do experts find top stocks to invest in?
- Investing in global stocks
- How to invest in international shares on global stock markets
- Benefits of investing in international shares
How to invest in stocks that benefit from a moving Australian dollar
A moving Australian dollar heralds mixed blessings for stocks on either side of the currency divide.
Investors should understand some useful guiding principles, when it comes to identifying the most likely winners and losers from a falling Australian dollar.
While currency should never be the only determinant of stock selection, you can’t incubate yourself against currency risk with around 30 per cent of Australia’s listed companies sourcing earnings from offshore.
That’s why you need to know the currency impact on the stocks you own. The more direct the currency exposure your businesses have, the greater the earnings hit (good or bad) is likely to be.
Everything else being equal, a 10 per cent drop in the Australian dollar could typically be expected to increase company earnings by a notional 3 per cent.
A falling dollar is typically good for exporters, especially companies in agricultural and manufacturing sectors, as it boosts their price competitiveness in overseas markets. Property trusts with unhedged overseas exposure should also benefit.
Key beneficiaries of a falling Aussie dollar
ASX-listed stocks with both local and offshore earnings include CSL Limited (CSL), Coca Cola Amatil (CCL), Cochlear (COH), Ansell (ANN), Ramsay Health Care (RHC), Amcor (AMC), Brambles (BXB) and Westfield Group (WDC).
Stocks positioned to benefit from a falling dollar
From an earnings perspective, a weaker Australian dollar is also expected to have a positive earnings effect – especially for miners and other companies with large amount of their revenues in $US – through either conversion – when exporters compete with imports in Australia – or translation – when foreign currency is converted to Australian dollars on balance sheet.
But you need to understand that the effect of falling commodity prices and reduced demand for goods and services far outweighs the translation effect of having offshore earnings.
Included among industrial stocks positively impacted by a falling Australian dollar are Paperlinx (PPX), Incitec Pivot (IPL), Caltex (CTX), Sims Metal Management (SGM), Arrium (ARI), Aristocrat Leisure (ALL), James Hardie (JHX), Treasury Wine Estates (TWE), QBE Insurance (QBE), Amcor (AMC), Boart Longyear (BLY), Domino’s Pizza (DMP), Navitas (NVT) and Sonic Healthcare (SHL).
Losers when the dollar falls
Given that currency is a by-product of global economic conditions and investor risk tolerances, cyclical stocks tend to underperform their defensive counterparts in a falling Australian dollar environment. Similarly, the declining value of the dollar should disadvantage importers and industrial stocks with little overseas exposure, and consequently little negative translation effect.
Stocks in this category are Qantas (QAN), Virgin Australia (VAH), The Reject Shop (TRS), Goodman Fielder (GFF), Wesfarmers (WES), Pacific Brands (PBG), JB Hi-Fi (JBH), Harvey Norman (HVN), Toll Holdings (TOL), Computershare (CPU), Flight Centre (FLT), plus selected media stocks, including Ten Network Holdings (TEN) and Seven West Media Ltd (SWM).
However, given that they often hedge their orders up to a year ahead of their sale period – using forward exchange contracts – the impact of a falling Australian dollar on retailers can take some time to be fully realised.
Given that the Australian dollar still hasn’t dropped that far from its record highs, there’s still plenty to be gained from capitalising on further falls, and if it is destined to fall to around US85¢ – which, incidentally, would remain above historical averages – a review of opportunities outside Australia could be timely.