Is Macquarie Group Ltd headed for a downgrade?


One of the great things about an investment in Macquarie Group Ltd (ASX: MQG) for shareholders is its exposure to overseas markets, assets and revenue.

In its latest report, Macquarie showed profits rising by 29 per cent to a record $2.063 billion with over 68% of total income now coming from overseas.

macquaire 1

Source Company presentation

Along with record profits, Macquarie issued expected guidance for FY17 broadly in line with FY16 with the following provisions.

‒ Market conditions

‒ The impact of foreign exchange

‒ The cost of our continued conservative approach to funding and capital

‒ Potential regulatory changes and tax uncertainties

As we now know Britain has voted to leave the European Union and the news has sent the British pound falling against most major currencies. With 24% of Macquarie’s income coming from Europe and the Middle East, it is likely that the falling pound and euro will impact on future earnings.

macbank 2

Source Company Presentation

Before investors rush to sell Macquarie shares, it is important to note that Brexit has also seen the Australian dollar decline against the US dollar and Asian currencies which make up 44% of Macquarie’s income. This movement should go some way to offsetting the effect of a falling British pound.

macbank 3

Source Macquarie Company presentation

Since the GFC Macquarie has moved its business more towards annuity-style income in an effort to provide smoother returns for investors.

With this in mind I believe the chances of Macquarie meeting its guidance will depend largely on how quickly world markets recover, rather than foreign exchange movements.

Investors should also factor in Macquarie’s renowned ability for deal making and the increased likelihood of possible deals due to current market conditions.

Foolish takeaway

Since the British vote, Macquarie has fallen around 15% which in my opinion is an overreaction to the actual impact on Macquarie’s bottom-line. Currently trading on a PE of 11 and dividend yield of 6%, I am happy to hold as a long-term investment.

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Motley Fool contributor Alan Edmunds owns shares of Macquarie Group Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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