Confession time: Beating around the hedge

The weaker currency is expected to lift most boats. But a few could leak the early gains in hedging losses.

Confession time. The downgrades have been coming thick and fast in recent months and could reach a crescendo in the next few weeks, ironically because of the drop in the Australian dollar.

Craig Dunn was at it this morning but for more traditional reasons. AMP appears to be to doing it tougher than first thought. The marriage with AXA was supposed to drive efficiencies and lower costs.

But with high end investors increasingly opting to take superannuation into their own hands – one third of the $1.3 trillion super pool has gone DIY- the margins on wealth management just aren’t what they once were.

Adding to the woes, a surge in claims on income protection policies has hurt AMP’s projected income. And customers are opting not renew policies.  As a result, underlying earnings in the first half could be as low as $415 million compared with $491 million in the same period last year.

Trying to figure out this year’s earnings season is turning into a lucky dip.

It’s generally agreed the weaker currency will boost earnings across a broad sector of the market. There’s a race on from analysts to pick which stocks will rise the most. Deutsche this morning predicted Bluescope Steel will benefit far more than even the company estimates.

The analysts reckon every 1c fall in the dollar will lift earnings by up to $10 million, more than double the company’s estimates.

But the sleeper in all this is hedging. Who has it? How much? And at what level?

It could well be that for a large number of companies, the expected early gains from the currency drop could be eaten up by hedging losses.

JP Morgan downgraded its outlook for Resmed’s full year result by 9%, largely on the back of projected hedging losses.

Big miners like BHP abandoned hedging years ago. The best hedge, they reckoned, was to amass projects across a broad portfolio and cop the fluctuations in commodity prices and currencies.