Falling dollar a positive for growth
Companies that earn the majority of their profits offshore will be the big winners, writes Max Mason.
You could be forgiven for thinking we were in the midst of a currency crisis over the past few months, with headlines like "Australian dollar crashes" commonplace among the media, but behind the hype there is a deeper tale to be told.
Consumers have reaped the benefits of a higher Australian dollar, splurging on overseas trips like in no other time in our history, (travellers will tell you - wherever you go, there is always an Aussie) and increasingly moving online for everything from clothing to video games and jewellery.
Domestic companies have struggled to adapt to a global environment where shoppers can take advantage of lower costs and wages in other countries all with the click of a button. While some might say that is their own fault, that is a different argument.
"It is always perplexing to see how much of the mainstream media report declines in the value of the Australian dollar as a negative development and something that poses a threat to Australia's wealth and prosperity," said Richard Gibbs, global head of economics at Macquarie.
The Reserve Bank of Australia also believes that a lower dollar will be good for Australian companies.
In its statement on monetary policy, released on Friday, the RBA estimated a 10 per cent depreciation of the exchange rate could stimulate growth by 0.5 to 1 per cent of GDP over two years or so.
"Further depreciation of a similar magnitude to that already experienced to date could, for example, deliver above-trend growth sooner than currently forecast," the central bank said.
The local currency has fallen 14 per cent since its 2013 peak of US105.98c in January.
It is one of the worst performing currencies this year.
The dive was sparked in May, when US Federal Reserve chairman Ben Bernanke gave his first hint that the Fed was keen to wind-up its $US85 billion a month bond buying program, which has been pumping money into the US economy.
Bernanke's quantitative easing policy has essentially been devaluing the greenback against most major currencies, with the Aussie reaching a record high of US110.2c in July 2011.
The fall in the Australian dollar is likely here to stay, with most economists predicting a new average somewhere between US80c-US85c, and there are local stocks that stand to benefit. Companies with exposure to America and earn their income in US dollars are the most obvious candidates to take advantage of a weaker Aussie dollar.
"However all other things are not equal, typically you'll find because the Aussie is a high yield commodity currency it tends to ebb and flow with the state of world growth,"said Credit Suisse analyst Damien Boey. He expects the local market to be weaker as the Australian dollar falls.
"Stocks I would pick on the basis of that would be defensive stocks and higher quality stocks, which just so happen to be a lot of the US dollar earners."
Taking a look at a handful of stocks which are heavily influenced by the greenback, the returns for 2013 are staggering. Healthcare companies CSL and ResMed have surged 22.5 per cent and 40.2 per cent respectively. Pallets group Brambles and packaging firm Amcor have also done well, up 21 per cent and 29.9 per cent.
"Anybody that is in an exporting related industry could benefit," said JBWere executive director Mike Kendall. "Also if they're domestic manufacturers and they sell domestically, it makes import competition more expensive, so it can ease the market." A big point over the last little while has been online shopping and whether people might start to return to domestic retailers, rather than source their goods from overseas via the internet. But the fall in the Australia dollar is a double-edged sword for retailers who have been crying poor with the Aussie above parity. They will face the challenge of the rising costs of imports if they source their goods offshore.
The lower dollar may lead to fewer Australians travelling internationally as the appeal of the high currency going further overseas disappears.
While there are obviously other contributing factors to their falls, Qantas and Virgin stocks have performed poorly this year.
Qantas has dropped 19.1 per cent and Virgin has lost 1.9 per cent.
On the flip side, travel companies Flight Centre and Webjet have proved stronger. Flight Centre has jumped a massive 57.4 per cent in 2013, while Webjet has inched up 2.5 per cent.
"A lot of the northern holiday spots have had pretty lean years because everyone has been jumping on planes to London rather than up to Noosa. You might see a little bit of reversal in that it makes Australia more accessible as a travel destination and people assess the costs," said Mr Kendall.