The Australian dollar has been a source of consternation for the Australian market. Six months ago a lot of commentators were saying that it was overvalued at around US 95 cents and it was blamed for tying the RBA's hands to further interest rate cuts. Now that the Aussie has eased to US 82 cents a leading fund manager has said that it could fall below US 70 cents – a lot lower than the US 75 cents that RBA Governor Glenn Stevens believes to be a fair price.
Taking into account the chaotic macro environment and volatility inherent in the FX market, it's not inconceivable that this could happen. Here are three ways you can take advantage of this downward trend via the equity market.
Gain exposure to companies with offshore operations
There are two reasons for this. Firstly in the absence of short term speculation, one currency will rise against another if it is expected to perform better in the future. Therefore a company's offshore operations will be bolstered by a strong macro environment. Secondly the weaker Aussie will amplify these earnings in local currency after FX translation – a positive double whammy.
The Australian market has a raft of companies with significant US operations. Healthcare giants ResMed Inc. (CHESS) (ASX: RMD) and Cochlear Limited (ASX: COH) can use their market leading positions to capitalise on this trend, whilst shopping centre operator Westfield Corp Ltd (ASX: WFD) will also benefit strongly with its exposure to a US retail sector with consumer sentiment at record highs.
Gain exposure to companies with offshore customers
The above rationales still apply, but the main reason here is international competitiveness. A weaker Australian dollar means that, on a relative basis, Australian goods and services become more affordable compared to similar goods and services in the eyes of foreign buyers. This will increase demand for exporters' items and create higher profits for the selling companies.
This means our exporters like dairy and cheese producer Bega Cheese Ltd (ASX: BGA) are set for a boost. The lower dollar will also boost local tourism as inbound travel from overseas visitors will increase, buoying the fortunes of Gold Coast theme park operator Ardent Leisure Group (ASX: AAD) for instance.
Invest in quality high-yielding stocks
The Australian economy is definitely not in good shape – the unemployment rate is still high despite its recent dip (6.1%), falling commodity prices are heavily hitting government budgets, and it's unknown what will fill the growth void left by the mining boom.
Sustained falls in the Aussie will unshackle the RBA to further lower the interest rate in a bid to resuscitate the economy. Although this is a good outcome for the economy, this is not a good outcome for those with money parked in savings accounts.
Investing in quality companies with high dividend yields such as Insurance Australia Group Ltd (ASX: IAG) and Collins Foods Ltd (ASX: CKF) will both boost your income and give you better returns.
