Winning and losing stocks from Aussie dollar decline

Though the effect of currency moves is secondary to other variables, Australian currency falls will impact those in export and tourism.

The fall in the Australian dollar will only give a moderate lift to some exporting companies. Any dent to global growth from the US-China trade stand-off could be far more harmful to companies than any resulting drop in the currency, according to Peter Warnes, head of equity research at Morningstar.

While a lower currency generally makes Australian exports more competitive, the Australian economy would be dragged down if the US or global economy slips into recession because of a global trade slowdown, says Warnes. He predicts a 50 per cent chance of a global recession within two years.

The Australian dollar has recently slid to US73.5 cents, a one-year low against the US dollar, with trade tensions between the US and China, along with rising US interest rates, combining to push the local dollar lower. US President Trump’s latest threat of new tariffs on US$200 billion worth of goods has also triggered share market volatility.

"Any US-China trade stand-off would impact on global trade, which is the engine room of global growth. I’m predicting there is a 50 per cent chance of a global recession within two years, and that could greatly affect Australia," says Warnes.

"If Chinese domestic demand slows or China exports less because of US tariffs, then this could lead to a situation where there is a meaningful impact on China’s economic growth, and that would have an impact on demand for Australian resources and the local economy," says Warnes.

"If the US goes into recession before 2020, which is highly likely, and the Chinese economy is slowing, and with the Eurozone is beset with pontifical uncertainty and the UK dealing with Brexit, then a global economic recession is possible."

BHP Billiton (ASX: BHP) chief executive Andrew Mackenzie has previously said that Trump’s plans to impose tariffs on imported steel would harm the global economy and was "a black day for the world and business".

But views are mixed. Rio Tinto (ASX: RIO) in an investor presentation last week said "trade tensions are unlikely to materially affect steel demand" noting "strong external demand for Chinese exports despite an increase in trade tensions".

In the short term, while trade tensions simmer, the local dollar is expected to remain under pressure. Commonwealth Bank (ASX: CBA) has recently revised down its Australian dollar forecasts against the US dollar. At the start of 2018, CommBank currency strategists had a base-case scenario that the Australian dollar would trade towards US83 cents by year's end. CommBank recently reduced that forecasts to US78 cents by the end of December 2018.

According to Warnes, the fall in the Australian dollar will help likely iron-ore miners, whose commodity exports are in US dollar contracts while their costs are expressed in Australian dollars, aiding their profitability, says Warnes.

Also benefitting would be those companies linked to in-bound tourism, such as Qantas (ASX: QAN) and Event Hospitality & Entertainment (ASX: EVT), which operates hotels and resorts across Australia.

"In-bound tourism operators will benefit as tourists will have greater spending power given the currency’s depreciation. The hotel sector too will benefit from the rise in tourism that comes with a lower AUD/USD, and other tourism service providers," says Warnes.

Another beneficiary could be Sydney Airport (ASX: SYD), which is enjoying strong international traffic growth. Chinese arrivals are growing strongly, helping to push up Sydney Airport’s earnings. The lower currency will help attract other international travelers as their spending power will rise. International travelers spend much more than domestic passengers, including on retail good, such as duty-free shopping, and they also pay more in airport charges.

Other companies that may see some benefit will be those deriving some of their revenue in the US, but reporting in Australian dollars include Aristocrat Leisure (ASX: ALL), which is enjoying strong growth in the company’s Americas business. Another is Macquarie Group (ASX: MQG), which has significant offshore operations.

David Ellis, head bank analyst for Morningstar Australasia, says that across Macquarie Group, approximately 66 per cent of its net operating income is sourced offshore. The group currently employs over 14,000 staff in over 25 countries with 55 per cent of its staff located overseas.

"A 10 per cent movement in the Australian dollar is estimated to increase or decrease full year net profit after tax by approximately 6 per cent," Ellis says.

Other beneficiaries of a lower currency include Breville Group (ASX: BRG) and Treasury Wine Estates (ASX: TWE), which has vineyards in Australia, New Zealand, Italy and the US, generating significant overseas revenue from exports.

However, for companies with significant offshore operations such as CSL (ASX: CSL), ResMed (ASX: RMD), James Hardie (ASX: JHX), Amcor (ASX: AMC) and Brambles (ASX: BXB) that report their financial results in US dollars, and have their revenue expressed in US dollars, there won't be any benefit from the lower local currency, says Warnes.

More from Morningstar

• Telstra overhaul the jolt it needed, says Morningstar

• Miners overvalued amid false price hopes, falling China demand

• Make better investment decisions with Morningstar Premium | Free 4-week trial

Nicki Bourlioufas is a contributor for Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.