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 MARKET REPORTS |
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Analyst report - stocks
Stock winners and losers from bullish currency
November 5, 2007
Brendon Lau, ShareAnalysis
The rising Australian dollar has been capturing headlines lately as it hovers around 23-year highs against the US dollar. With another expected interest rate hike round the corner, it looks like our dollar is not about to give ground easily. While most consumers are happy about the strong currency, the high dollar is a mixed blessing for our stock market.
It is not only the US dollar that has lost ground to the Australian dollar. The British pound, Japanese yen and the 13-nation euro have slipped between 5%-10% against our surging dollar due to our relatively high interest rates - a by-product of the economic boom. The economy, in theory at least, is somewhat auto-balancing. A lift in interest rates taps on the brakes of economic growth, which, in turn, slows inflation and that leads to stable interest rates. Sadly, that did not quite happen over the last few rate hikes.
Retailers and airline companies, though, are not complaining. The higher Australian dollar makes it cheaper for retailers to import goods and takes the edge off record high fuel prices. However, it is hard to find bargains, as many in these sectors are currently fully priced.
One retail stock that will not benefit from the fortunes of the Australian dollar is Billabong (BBG), as it sells its sports apparel to a number of international markets. This means that its translated Australian dollar earnings are likely to be impacted. Nonetheless, we maintain our positive outlook on the company.
Another sector with substantial exposure to international markets, like the US, is property. These trusts derive a large part of their income in foreign currencies. If you prefer to remain exposed to such stocks, it would be a good idea to switch to those that have largely hedged away their foreign currency risks. Centro Retail Trust (CER) is one such example, as over 90% of its foreign currency exposure has been hedged until July 2010.
Mining stocks, to varying degrees, are relatively immune to changes in the Australian/US dollar. The weakening greenback usually drives up commodity prices (and vice versa). However, nickel and zinc producers could feel some pressure as prices of these industrial metals have actually softened 10.6% and 34.3%, respectively, since the start of 2007.
Also, some miners will suffer more than others, depending on their percentage of costs and debt denominated in Australian dollars. Iluka Resources (ILU) is one that will suffer more than most if the Australian dollar continues its upward march. Every one cent gain in the A$/US$ exchange rate wipes off $4M in NPAT. Longer term though, we believe ILU has upside potential from a number of projects that are expected to come online.
Meanwhile, as the overseas operations of Amcor (AMC) and PaperlinX (PPX) smart from the A$/US$ sting, their local operations are facing the threat of increased foreign competition. As our dollar strengthens, overseas products become relatively cheaper. This pressure is worse for these companies as they operate in competitive industries.
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
More articles from this week's CompareShares newsletter:
Fundamentals: Telltale signs to sell that stock
Stocks: Another hot mining prospect
Smart investing: ATO toughens up on SMSFs
Resident Trader: How to profit from volatility - part 3
Stocks: Stock winners and losers from bullish currency
Stock of the week: Straits Resources weathers the storm
CFDs: ASX launches CFD exchange
Expert panel (CFDs): Top Ten CFD stocks for the week
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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