4 shares to profit from the falling Australian dollar

I’ve lost count of the amount of articles I’ve written over the years flagging the potential for share market investors to profit from a falling Australian dollar.

Back in 2013 the Aussie dollar was trading at close to parity with the U.S. dollar, but has since fallen 29% to buy just U.S. 71 cents today, with the U.S. Federal Reserve in the middle of an interest rate rising cycle to keep a lid on its hot economy.

Just in June 2018 I wrote how the Australian dollar was likely to fall below its existing level of US74.3 cents over time as central bank interest rates are the key driver of medium-term exchange rates.

Of course certain economic data points over the short term may feed into or change rate expectations, but so far it has proven a mistake not to zoom out to the long term view of a falling Aussie dollar.

Some of the companies I flagged as worth investing in last June as part of this theme were Cochlear Ltd (ASX: COH), CSL Limited (ASX: CSL), ResMed Inc. (CHESS) (ASX: RMD), Computershare Limited (ASX: CPU) and Altium Limited (ASX: ALU). Since then all of them have surged higher in part thanks to the lower dollar.

In early June the US Fed lifted its base interest rate to 1.75% to 2%, while flagging the likely trajectory of interest rates for the rest of the year and out to 2019 via its dot-plot chart.

It (below) shows how the average expectation of the US Fed’s 15 members now suggests two more rate hikes in 2018. While in 2019 more than half of the Fed’s 15 members expect US rates to sit above 3%.

Source: US Federal Reserve

Given rates in Australia look likely to remain on hold at 1.5% to well into 2019 it should be apparent that the Australian dollar could fall further if U.S. rates are sitting above 3%.

Of course spot rates represent future rate expectations, but the wider the interest rate gap between the two nations the wider the exchange rate gap could become in time.

As such while a lower Aussie dollar is not a certainty in the 18 months ahead, it makes sense to have some of your portfolio weighted to this scenario. Below are a few businesses I still like that offer exposure to this theme.

Macquarie Group Ltd (ASX: MQG) is the asset management business and investment bank that also gives investors exposure to the U.S. economy. It also pays a big dividend and has an outstanding track record of re-orientation since the GFC. A recent pull back in price to $122.41 today looks a solid opportunity.

Magellan Financial Group Ltd (ASX: MFG) is a business that benefits from a weaker Aussie dollar as its costs (largely staff) are mostly in local dollars. However, its underlying asset base on which it charges revenues is priced in U.S. dollars. It also looks reasonable value at $27.30 with a healthy yield after a recent price-earnings multiple de-rating by the market.

Crown Resorts Limited (ASX: CWN) is the hotel and casino operator that benefits from greater inbound tourism and the decision of Australians to holiday at home. Crown also boasts a monopoly asset and cash generating machine in the form of its Crown Resort in Melbourne, with some big development projects in the pipeline. Its valuation looks reasonable at $13.61, with a decent yield to boot.

Nanosonics Ltd (ASX: NAN) is the hospital equipment disinfectant business that may have a lot of growth ahead of it globally. The vast majority of its revenue and profits is earned in U.S. dollars and as such it’s a direct beneficiary of a falling Australian dollar. The stock has pulled back a little to $3.30 this afternoon.

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