Where to invest if the Australian dollar falls

Where to invest if the Australian dollar falls

However, investment strategists point out that volatility in currency markets presents an opportunity for certain areas of the local stock market.

These include companies listed on the ASX that derive a significant proportion of their income from US investments, including a number of industrial and healthcare companies.

Fund manager VanEck highlights CSL (which generates almost half of its revenue from the US) as a key beneficiary alongside other locally listed stocks with high exposure to the world’s largest economy such as Computershare, James Hardie, Block, Aristocrat, Cochlear, ResMed and Amkor.

However, Morgan Stanley notes that weakness in other major currencies, including the euro, sterling and Japanese yen, is complicating matters.

There are 41 stocks in the broker’s coverage that have US sales exposure of 20 percent or more, but more than half of them also have significant exposure to Europe, the UK, or both.

Local companies that export goods or services, such as mining and agriculture companies, will also benefit from Aussie weakness as it makes Australian commodities more attractive to foreign buyers.

Daniel Pennell, who heads Plato’s Global Shares Income Fund, points to BHP, South32, Woodside and Incitec Pivot as ASX-listed companies likely to benefit from Australian dollar weakness.

However, this should be weighed against the fact that a stronger US dollar typically weighs on global commodity prices, as many commodities are traded in the currency. This makes commodities in other non-US dollar currencies more expensive and puts pressure on demand.

While acknowledging that a stronger US dollar and recession risks are having a negative impact on commodity prices and mining stocks, Morgan Stanley maintained its “overweight” position in the energy and resource sector.

“A potential floor in oil, and our global team’s view that iron ore can hold current levels for the next six to nine months, presents an opportunity to combine the lower Aussie dollar with commodity prices, which will strengthen the valuation and credentials of the free cash flow,” said Morgan Stanley equity strategist Chris Nicol.

A weaker Australian dollar should also provide a much-needed boost to local travel stocks as US citizens benefit from the exchange rate and local consumers are more inclined to travel interstate than to the US.

“A weaker Australian dollar is usually seen as a growth stimulus for our economy, encouraging local versus (now more expensive) global manufacturing and encouraging us to travel domestically,” says Haslem.

“If it’s sustainable, it can boost some of our key export sectors like tourism and education.”

Local businesses that are most vulnerable to the rising greenback are those with US dollar-denominated costs or companies that import goods from the country and cannot pass these increased costs on to consumers.

But since Australia doesn’t have many manufacturers and the economy isn’t overly dependent on US goods and services, the US dollar’s strength won’t have a noticeable impact on Australia’s large-cap stocks, VanEck said.

Broker Wilsons also notes that some consumer discretionary companies typically suffer margin pressures when the local currency falls because their products are wholly imported or composed largely of imported components.

hedge debate

Australian investors investing directly in global or US equities also have the option to hedge their offshore positions to reduce the impact of currency fluctuations on their investment performance.

VanEck encourages investors to consider hedging foreign holdings against the Australian dollar as VanEck believes the currency is becoming oversold against the greenback.

“Over the past month, the amount of money that has flowed into our VanEck MSCI International Quality (Hedged) ETF has increased,” said Russel Chesler, VanEck’s head of investments.

“[This] reflects the Aussie’s lower level and the view that it has more upside than downside.”

In contrast, Plato’s Global Shares Income Fund is unhedged, allowing its investors to take advantage of diversified currency exposure as the Australian dollar often weakens when global equity markets weaken.

“Today’s environment is a good example of why an unhedged allocation to global equities, particularly for income investors, can help protect returns when markets fall,” says Pennell.

Credit Suisse Australia also maintains its longstanding strategy of leaving its international equity holdings fully unhedged to reduce volatility for local investors.

“We are actively considering the level at which we would protect ourselves. In the FX markets, the question is how long is the string,” said Andrew McAuley, local chief investment officer at Credit Suisse. “If we hedge, it won’t be a significant position.”

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