Unless you are planning an overseas holiday, a fall in the Aussie dollar is not necessarily a bad outcome. As investors it is potentially rewarding to invest in stocks with great fundamentals that have seen their share prices capped by the prevailing high currency.
In recent days the currency has plummeted from a high of US$94.02 to a low of US$90.92. This fall by over 3 cents represents a 3.3 % tumble. Before discussing individual stock beneficiaries, let’s examine if the decline is sustainable. Many market commentators are anticipating further currency weakness as there are several factors at play including:
1. Chinese data releases indicating restrictions on credit growth which formerly underpinned investment demand.
2. A detrimental impact on Australia’s terms of trade caused by the steady decline in iron ore and coal prices.
3. The final straw appears to have been a strengthening US dollar due to potential upward pressure on cash rates in the United States.
What stocks are the main beneficiaries?
In a recent article I highlighted five stocks including Rio Tinto Limited (ASX: RIO), where a 10 % fall in the Aussie dollar would result in a $515 million lift in full-year 2014 underlying earnings. Similarly, BHP Billiton Limited (ASX: BHP) gains approximately $100 million in net profits from every 1 cent fall in the currency.
The broking division of leading global bank Citigroup recently looked at the currency impact on FY2015 net profit after tax (NPAT) for Australian stocks. The parameters were a fall in the currency from US$95.00 to a low of US$88.00. In addition to BHP and Rio Tinto, some of the stocks highlighted were:
Cochlear Limited (ASX: COH) – projected NPAT currency uplift of 23%.
Fortunately the fall in the currency coincides with a surprise improvement in second half earnings during the August reporting season.
Newcrest Mining Limited (ASX: NCM) – projected NPAT currency uplift of 25%.
While the recent profit release was hampered by another big write-down (largely attributable to Lihir), the company’s underlying profit was well ahead of expectations.
Santos Ltd (ASX: STO) – projected NPAT currency uplift of 19%.
The company surprised with an earlier-than-expected dividend increase. Another dividend increase is expected from the GLNG project which is converting coal seam natural gas (CSG) to liquefied natural gas (LNG) for export to global markets.
Western Areas Ltd (ASX: WSA) – projected NPAT currency uplift of 28%.
Like Santos, the dividend surprised to the upside during the reporting season. In addition, the overall result significantly exceeded market expectations.
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Returns as of 6th October 2020
Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.
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