How the High Australian Dollar Will Affect Each Sector

The Australian dollar has recently surpassed US$0.80. Once of the reasons is that after the latest speech by US Federal Reserve Chair Janet Yellen, investors believed the US will not hike rates as aggressively as first thought. The market therefore decided to invest in other higher yielding countries other than US. Also, investors are starting to believe the pro-growth ideas Trump promised before he was elected may not transpire. The market initially thought the Trump presidency would deliver strong economic growth and more rate hikes however that sentiment is now fading. This has all contributed to the weakening of the US dollar and strengthening of the Australian dollar. But what does this mean for the each of the sectors on the ASX?

Below is a list of the different sectors on the Australian market and how they are affected by a rise in the Australian dollar:

1. Financials: Banks have funding sourced from offshore sources. The rise in the Aussie dollar would make this funding cheaper. However, banks are required to currency hedge their offshore position so a rise in the Aussie dollar should not affect them too much. Having said that, any of the banks which have earnings overseas would be affected unfavourably.

2. Materials: Companies in the materials sector are negatively impacted from the rise of the Aussie dollar as they export their goods to other countries. These goods have now become more expensive overseas from the strengthened Aussie dollar. For instance, countries looking to buy iron ore will now find Australian producers more expensive compared to other competitors such as Chilean miners. The higher AUD will decrease their competitiveness in the international market.

3. Real Estate: Interest rates have a direct impact on REITS as these trusts are highly geared, whereas a high AUD dollar has an indirect impact. The RBA will raise rates if they feel inflation is too high and one of the factors they evaluate is the AUD dollar. Hence the high AUD dollar will only affect REITS if it contributes to high inflation. At this point, inflation is still low so interest rates are unchanged and therefore have not had an effect on the REITs. REITs which have US exposure will see decreasing earnings from the currency conversion. Westfields is one stock that has a large exposure in the US market. Industrial Real Estate Trusts will be affected as a high AUD dollar may have a negative effect on earnings these industrial companies which has a knock-on effect on their ability to pay rent on commercial property.

4. Industrials: Manufacturing will feel a jolt; the high AUD may make it harder for Australian manufacturers to stay competitive in an international market where other players have lower currency rates. When goods and services are priced in Australian dollars, these products become more expensive in the foreign markets when the Australian dollar appreciates. For example, car manufacturer Holden and Ford closed their manufacturing plants in Australia as the high AUD dollar was stated as one the reasons for lagging profits as it became too expensive to operate in Australia. Offshore earners such as Boral and James Hardie where are a large portion of the operations are generated in USD will be hit.

5. Consumer Staples: Consumer staples will be affected if they export products overseas. The cost of their products will now cost the overseas consumer more. If there are other cheaper competitors from other countries in the market, then they could perhaps eat into their market share.

6. Consumer Discretionary:

i) Tourism and Leisure: It is cheaper for an Australian to travel overseas with a strong dollar but it would deter visitors from coming to Australia. To a tourist, Australia is now more expensive so when there are other choices on offer, they may decide to travel to another country where they can get better value for their money. This is a negative on tourism and hospitality stocks.

ii) Education stocks: The falling dollar was previously a drawcard for overseas students selecting Australia destination for their university education. A high Aussie dollar may drive students to study in US or other countries with a cheaper currency rate.

iii) Consumer goods: goods which are made overseas will now be cheaper for Australians to buy however Australian made goods will be more expensive to local consumer. Shoppers may opt to choose imported goods over Australian good as it may now present as better value. Retailers who source large volumes of imported goods will find the cost to buy their products reduced. This should benefit retailers like JB Hi Fi.

7. Energy: Oil prices are quoted in USD dollars so a weaker USD dollar will also weaken the oil price and impact oil stocks. The share price of an oil stock is directly affected by oil prices. A stronger Aussie dollar can mean lower revenues. Energy stocks which have debt in US dollars will benefit from a high Australian dollar as essentially their debt levels have decreased from the weakened US dollar.

8. Telecommunication: This sector is not dramatically affected by a strong AUD currency only if the company has earnings in the US dollar.

9. Utilities: This sector is not affected by a weakened USD dollar, it is a defensive sector and investors may choose to rotate their stocks to another sector which has more upside from the AUD strength.

10. Information Technology: This sector is only affected if the company has a large exposure of earnings in the US dollar. Computershare has earnings in US dollars so the weakening US dollar can weaken their earnings position.

11. Health Care: Healthcare stocks which generate income from US will be negatively impacted by the stronger Aussie dollar whereas onshore earners will be positively impacted. Health care stocks which earn revenue overseas are Ramsay Health Care, Cochlear, ResMed, and Sonic Healthcare.

Lauren Hua is a private client adviser at Fairmont Equities.

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