The US Federal Reserve may have only increased interest rates by 0.25% this week, but the expectation is that it will gradually increase rates over the next couple of years as the US economy continues to strengthen.
A consequence of higher interest rates is usually an appreciating currency – in this case the US dollar would be expected to appreciate against the Australian dollar. As markets are always forward looking, it appears much of this appreciation has already been factored in with the US dollar already appreciating by around 25% since October 2014.
It is important to note, however, that our own local economy will also have an effect on our exchange rate. The end or slowing of the mining boom, coupled with record low interest rates has also played a part in driving our dollar down.
Although the Australian dollar has depreciated significantly over the last two years, there is a possibility that it could fall even lower if the US economy continues to strengthen or the Australian economy weakens further. Both scenarios are more likely than not, so investors should not be surprised to see the Australian dollar trading below 70 cents in 2016.
With that in mind, here are five companies with significant and growing overseas earnings exposure that could benefit from a lower Australian dollar in 2016:
1. Cochlear Limited (ASX: COH) – Cochlear looks set to be the next stock to break through the $100 level with its current share price hovering around $95. The bionic ear maker has significant operations abroad and around 43% of its sales comes directly from the Americas. After achieving record sales in FY15, Cochlear provided FY16 earnings guidance of $165 – $175 million based on an exchange rate of ~USD/AUD 75c. Earnings could be significantly higher if the Australian dollar continues to fall.
2. QBE Insurance Group Ltd (ASX: QBE) – 32% of QBE's gross written premium is earned in North America with another 28% written in Europe. Although the company provided a softer-than-expected third quarter update, it is still on track for a significant turnaround. Additionally, QBE is increasing its allocation of investments towards growth assets which could also help to boost shareholder returns. Investors should note however, earnings forecasts for insurers can be notoriously difficult to meet as a number of factors remain outside of their control.
3. Westfield Corp (ASX: WFD) – Premium shopping centre locations coupled with the most sought after tenants has allowed Westfield to deliver sales growth higher than the market average over a long period of time. Its most recent quarterly update showed retail sales growth of 7.1% – a solid result considering the increasing popularity of online shopping. The company operates exclusively overseas with 71% of assets located in the US and the remainder in the UK. Westfield also has a US$11.4 billion development pipeline which it believes will drive future earnings growth. Importantly for Australian investors, the company offers a defensive, stable source of dividends that are paid in US dollars before being translated into the local currency.
4. Catapult Group International Ltd (ASX: CAT) – Catapult may be a small company, but one with massive potential. It provides hardware and software technology for sporting teams to help track and improve athletic performance. Some of Catapult's customers already include teams from the NFL, NBA, NRL and English Premier League. Interestingly, in FY15, 38% of its revenues were earned in North America and 29% in Europe. The company expects to deliver 8,000 additional units in FY16 – a 56% increase over the previous year. Although the company is still cash flow negative, there remains a huge untapped market for Catapult and a lower Australian dollar will certainly help to boost revenues if it can take advantage of these opportunities.
5. Corporate Travel Management Ltd (ASX: CTD) – Corporate Travel has successfully expanded its geographic footprint over the past five years. In 2010, 100% of earnings were derived from Australia and New Zealand but this has now decreased by more than half to 47%. In FY15, North America contributed to 18% of the company's earnings with Asia contributing 30%. The company has suggested this trend will continue into the future as it looks to limit its exposure to one particular market. Although the shares trade at a substantial premium to the broader market, Corporate Travel has delivered 20 years of consecutive growth and is forecasting to deliver around 30% earnings growth in FY16.
