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Election aftermath: Lift US$ exposure

Peter Warnes  |  04 Jul 2016Text size  Decrease  Increase  |  

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The events of the weekend are negative for Australian financial markets. I believe the critical issue is the country's AAA credit rating and the implications for the Australian dollar.

The Australian dollar is in the top seven traded currencies. Brexit effectively took both the euro (second most traded) and the pound sterling (fourth most traded) out of the equation in the short to medium term.

This was reflected in the rise of the Australian dollar to 0.75 in post-Brexit trading, as the Australian dollar was seen as a safe haven.

The yen (third most traded) is trading at an unsustainable rate of 102 against US dollar. The Swiss franc (fifth most traded) and the Canadian dollar (sixth most traded) may see some support as currency portfolios rebalance.

These portfolios are likely to be overweight US dollars, yen and Australian dollars at present.

Whatever the final outcome the situation is worse for orderly government than it was last Friday.

Business investment is likely to be even more subdued, which could put pressure on unemployment. Private sector investment drives employment.

An eventual downgrade to Australia's credit rating has to be possibility. The banks' ratings would likely follow from AA- to A+ and into a crowded single A category.

In addition, the banks receive an uplift in their rating from government support, so any downgrade in the sovereign rating will drive a similar downgrade in issuers benefiting from government uplift.

It may add to the cost of international wholesale funds.

I think it is important subscribers look to increase their US-dollar-facing exposure, whether by direct investment in US-dollar stocks, through US company funds or a US dollar ETF, or by lifting exposure to Australian-listed companies with meaningful US dollar revenue and income.

A lower Australian dollar would benefit exporters and help tourism, hospitality and education service providers.

Our top recommendations include:


Source: Morningstar


Ardent Leisure (ASX: AAD) and Village Roadshow (ASX: VRL) are exposed to tourism.

James Hardie (ASX: JHX) has and 80 per cent exposure to the US dollar and Amcor (ASX: AMC) 35-40 per cent, but both look expensive. Brambles (ASX: BXB), with 45 per cent US and Canada, is a Hold.

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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