A STRONGER-than-expected Australian dollar will hit the earnings growth of some of the country's biggest companies in the next two years, a new report says.
Goldman Sachs sharply revised its estimate for the dollar upwards, saying that as concerns diminish about the global economy, the currency will hover at US108? for the rest of the year. Goldman had previously predicted the local currency would be worth US103? by December.
It said if the dollar remained high, companies in the industrial sector would take a hit to earnings in the next few years.
Goldman Sachs analyst and author of the report, Chris Pidcock, said the stronger dollar would cause the earnings before interest and tax for industrials stocks to fall by between 1.2 per cent 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 are also at risk.
The report also found fears about the state of the global economy had had a greater influence on stock prices in 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 in 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 to 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.