The Australian dollar has been performing strongly recently, with major tailwinds suggesting it will remain that way for a while.
So what does that mean for Australian shares, and which ones might be the victim of a higher dollar?
The analyst team at Wilsons Advisory recently put out a research note to their clients which sets out what some of the tailwinds are for the local currency.
Rates pushing the dollar higher
One of the major factors was the Reserve Bank of Australia's board decision to raise interest rates this week, and the expectation that it might raise rates again in the near future.
This contrasted, the Wilsons team said, with the US, where rates are expected to be cut "multiple times''.
A high interest rate creates demand for our dollar, as global investors can get better interest rates on their cash holdings if they move into Australian investments.
Wilsons went on to say:
This policy divergence is widening the AU-US interest rate differential, with futures markets currently implying the RBA cash rate will be 110 basis points higher than the Fed funds rate at year-end, enhancing the Australian dollar's appeal to investors globally.
Support for the Australian dollar was also coming from ongoing strength in commodity prices, Wilson said, bolstered by "a resilient global growth outlook'', and also by general weakness in the US dollar against most major currencies.
Wilsons added:
On balance, our base macro view points to further moderate upside in the AUD from current levels.
Swings and roundabouts
The forecast strength in the dollar creates different effects depending on how a business is set up.
It's a boon for those businesses buying goods and services in US dollars, while for those getting paid in US dollars, it's a downside.
Wilsons said 40% of the S&P/ASX 200 Index (ASX: XJO) companies' profits were derived offshore, but counterintuitively, resources companies, for example, tended to do well when the dollar was high, as commodity prices were often also high at the same time.
They added:
Additionally, Australian dollar strength often occurs amidst global risk-on environments, when positive investor sentiment encourages capital flows into Australian equities and other risk assets, providing support to valuations. Taken together, the impact of a stronger Australian dollar varies meaningfully across sectors and individual companies, creating a dispersion of winners and losers.
Companies that were exposed to the US dollar weakness in a negative fashion, Wilsons said, included ResMed Inc (ASX: RMD), CSL Ltd (ASX: CSL), Cochlear Ltd (ASX: COH), and Pro Medicus Ltd (ASX: PME).
Consumer-facing businesses were also at risk, with those exposed including Aristocrat Leisure Ltd (ASX: ALL), Treasury Wine Estates Ltd (ASX: TWE), and Breville Ltd (ASX: BRG), while tech stocks such as Wisetech Global Ltd (ASX: WTC) and CAR Group Ltd (ASX: CAR) were also exposed.
Among the financials, Macquarie Group Ltd (ASX: MQG) and insurer QBE Ltd (ASX: QBE) were exposed, as were Brambles Ltd (ASX: BXB) and Goodman Group (ASX: GMG).
Wilsons added:
These companies face near-term foreign headwinds to earnings (when considered in AUD terms), tempering our enthusiasm towards the group at the margin. However, we are sanguine that much of this impact is already reflected in valuations. P/E multiples have generally de-rated materially over the past six months, suggesting currency effects have been at least partially priced in by the market. Additionally, our preferred exposures – RMD, ALL, CAR, BXB and GMG – still offer attractive medium-term earnings growth prospects, even after accounting for adverse foreign impacts, which allows us to remain convicted in these names. Lastly, foreign exchange headwinds must be considered within the context of an otherwise broadly positive macro backdrop for offshore earners, with the currency impact to an extent offset by the superior US economic growth outlook and the prospect of multiple Fed cuts this year.
