A stronger than expected Australian dollar will hit the earnings growth of some of the country's biggest companies in the next two years, according to a new report.
A STRONGER than expected Australian dollar will hit the earnings growth of some of the country's biggest companies in the next two years, according to a new report.
Goldman Sachs predicts that, as concerns diminish about the state of the global economy, along with fears of a slowdown in Chinese growth, the Australian dollar will continue to hover at US108? for the rest of the year.
But if the dollar remained that high - the financial house had predicted the local currency would be worth US103? by December - companies in the industrial sector would take a hit to their earnings in the next few years.
Chris Pidock, a Goldman Sachs analyst and author of the report, said the stronger dollar would cause the earnings before interest and tax for industrial stocks to fall by 1.2 to 1.3 per cent, in both 2013 and 2014. That means net profit could fall by close to 1 per cent.
''The Australian dollar received a positive fillip from easing global tail risks, a less-worrying outlook for Chinese growth and slower-than-expected progress in the domestic [interest rate] easing cycle,'' the report said.
''Against this backdrop, our base case is for the dollar to track around US108? throughout 2012 ? we therefore expect ongoing negative earnings per share revisions to Australian companies.''
Paper and packaging firms, healthcare, general insurance and chemicals firms are singled out as those most at risk.
Developers and contractors were also at risk.
The report also found fears about the state of the global economy had had a greater influence on stock prices over the past four years than movements in the Australian dollar.
Looking at stocks with the strongest correlation to movements in the dollar, the ''key driver'' of share prices over recent years had been concerns about macro-economic conditions, the report said.
It found a high proportion of stocks with no exposure to currency movements, including companies such as CSL, Telstra, Coca-Cola Amatil, Westfield Group, Resmed and Woolworths, had a negative correlation to rises and falls in the dollar compared with the greenback.
It singles out Woolworths as an example of a company that will be ''sold down'' when the dollar strengthens, as investors get rid of defensive stocks to buy riskier ones.
Conversely, the report found share prices for resource stocks had had a positive correlation with movements in the dollar, despite the negative impact a stronger dollar had on their earnings.
Frequently Asked Questions about this Article…
What did the Goldman Sachs report predict about the Australian dollar?
Goldman Sachs said the Australian dollar was likely to remain strong — tracking around US$1.08 through 2012 — with a scenario that could see it near US$1.03 by December. The report linked the stronger dollar to easing global tail risks, a less-worrying outlook for Chinese growth and slower-than-expected domestic interest-rate easing.
How will a stronger Australian dollar affect company earnings?
The report warned a sustained stronger dollar would hit company earnings. For industrial stocks it forecast earnings before interest and tax (EBIT) to fall about 1.2–1.3% in both 2013 and 2014, which could translate to net profit declines of roughly 1%.
Which sectors are most at risk from a stronger Australian dollar?
Goldman Sachs singled out paper and packaging, healthcare, general insurance and chemicals as sectors most at risk. Developers and contractors were also identified as vulnerable to a stronger local currency.
How have global economic fears compared with currency movements in driving share prices?
The report found that over the past four years fears about the state of the global economy had a greater influence on Australian share prices than movements in the Australian dollar, making macroeconomic concerns a key driver for investors.
Which specific companies showed a negative correlation to rises and falls in the Australian dollar?
A high proportion of stocks with little or no direct currency exposure showed negative correlation to the dollar. The report named CSL, Telstra, Coca‑Cola Amatil, Westfield Group, ResMed and Woolworths as examples of companies that tended to move negatively when the Australian dollar climbed.
Why might Woolworths be sold down if the Australian dollar strengthens?
The report used Woolworths as an example of a defensive stock that could be sold down when the dollar strengthens because investors often rotate out of defensive names and into riskier, cyclical assets when currency and macro conditions improve.
What did the report say about resource stocks and the Australian dollar?
Despite the potential negative impact of a stronger dollar on resource-company earnings, the report found resource stocks’ share prices had shown a positive correlation with movements in the Australian dollar.
What should everyday investors take away from the Goldman Sachs findings about the Australian dollar?
Everyday investors should be aware the report expects ongoing negative earnings-per-share revisions if the Australian dollar stays strong. That means checking portfolio exposure to currency-sensitive sectors (like industrials, paper, chemicals and certain healthcare firms), understanding which holdings are defensive versus cyclical, and monitoring macro signals such as global growth and China outlook that can drive both the dollar and stock prices.
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