And the surge in the Australian dollar, notably from late December, “is now going to prove a translation headwind for those companies that translate their earnings into Australian dollars.”
Companies won’t have anticipated the rise of the currency when they gave their previous outlooks, he said.
“So we would expect the first impact of this Australian dollar move to start to feature in analyst previews for February results and also in company outlooks,” he said.
“This is the return of the outlook,” Mr Nicols said. “Currency is going to feature in that.”
Global growers
Approximately 31 per cent of the S&P/ASX 200 index comprises of companies that Mr Nicol defines as “global growers” – or companies that derive at least 25 per cent of their revenue from offshore.
“For the higher growth secular growers that are that are moving into revenue opportunities and growth opportunities bigger than in Australia – I don’t think it’s necessarily a problem,” said Mr Nicol.
“But for those companies that are perhaps more mature and lower growth, there’s potentially a much bigger impact from this currency move – particularly if the currency was to move higher than our expectations at the moment.”
Morgan Stanley has a US77c a share forecast for the Australian dollar by the end of the year.
In Friday’s flat overall trading session, some companies fell sharply. Offshore earners blood products firm CSL, down 1.4 per cent, and Aristocrat, down 3.9 per cent, were dented.
Giselle Roux. Louie Douvis
CSL is a stock that has “significant negative share price sensitivity to an appreciation in the Australian dollar,” said UBS Australian equity strategist Pieter Stoltz.
Broadly “offshore earners could experience revenue headwinds due to ongoing Australian dollar strength,” said Mr Stoltz.
For the domestic Australian companies the rise of the Australian dollar matters if they have an exposure to US dollar denominated assets or trade, said independent strategist Giselle Roux.
“All other things being equal, Qantas tends to be quite leveraged to US dollar movements because oil prices are in US dollars and that’s their second biggest cost after labour,” she said of the airline.
“A company like Treasury Wines which has a fairly large US market – even larger now proportionately given what China has done to it – can’t escape a margin squeeze if it wants to keep the same pricing in the US market,” she said.
Mr Nicol agreed. “For companies that report in US dollars and have Australian share prices, translating a US dollar valuation into an Aussie dollar valuation becomes a headwind with a rising Australian dollar.”
On the other hand, one sector that tends to benefit from a higher Australian dollar is resource companies, Mr Nicol noted. That’s because, if the Australian dollar rises, it’s usually being driven by strength in commodity prices.
“So it should bode well for continued rotation into resource stocks,” the strategist said.
Retailers could also benefit from a higher Australian dollar “but with a lag due to foreign exchange hedges,” Mr Stoltz said.
The retailers that stand to gain the most from the Australian dollar appreciation are those that sell private label products such as Premier Investments, Adairs, Wesfarmers and Supercheap, he said. “As importers of auto parts, GUD and Bapcor also stand to benefit,” he said.
Ms Roux agreed. “Some companies that do import will find that things are relatively cheaper. It depends on whether they are able to retain that profit margin or whether it gets passed on to the consumer in lower prices and that just depends on the nature of the market.”

You may also like