As Motley Fool Analyst Mike King explained here, the latest Reserve Bank of Australia's (RBA) board minutes suggest further interest rate cuts could be just around the corner. The RBA is obviously concerned about Australia's terms of trade and the exchange rate, with the minutes stating:
"… an important contributor to the recent depreciation of the Australian dollar had been the US dollar's appreciation. Members noted, however, the Australian dollar had depreciated against most currencies, reflecting further declines in commodity prices and market concerns about the outlook for China, as well as the reduction in the cash rate in May. Over the past month, the exchange rate had depreciated by around 5 per cent in trade-weighted terms and it was around 8 per cent below the historical high reached in early April."
While there is no guarantee that further cuts to the cash rate will automatically lower the Australian dollar, it should create impetus for further weakening. A weaker Aussie dollar will benefit a number of companies with significant overseas operations, however as the board minutes also stated, "the euro area remained in recession", so considering in which countries, as well as in which currencies a company makes its sales is important too.
With nearly 50% of Brambles' (ASX: BXB) pallet business revenue coming from the Americas division and a further 40% from Europe, Middle East and Africa, the company has significant exposure to foreign currencies. One advantage of Brambles' business model is that its foreign operations use facilities and workers based in the foreign country, which creates a natural currency hedge for expenses but the company can still benefit from Aussie dollar currency translation.
Treasury Wine Estates (ASX: TWE), which owns many of Australia's most famous wine brands and exports globally, makes around 43% of its revenue in the Americas. While Australia is still its single largest market, the company has a significant US dollar exposure and has the potential to benefit significantly from a weaker currency which makes imported wine more expensive and at the same time its exports to the world cheaper.
CSL (ASX: CSL) does approximately 42% of its business in the US and a further 31% in Europe. Unlike CSL and Treasury Wine, given the critical health-related nature of CSL's products it is much less exposed to the recession in Europe. Like Brambles it also has significant overseas-based facilities which effectively hedge some of its expenses to currency fluctuations.
Foolish takeaway
Given the benign outlook for growth in the Australian economy, investors need to search far and wide for pockets of growth. One such area (or theme) is companies with significant overseas operations that can either benefit from faster growing overseas markets or benefit from a potentially weaker Aussie dollar – or ideally both!
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
