Which stocks win or lose with the high Aussie dollar?
Travel stocks are among the winners while gold stocks take a hit as the AUD rallies higher.
- The Australian dollar has risen 7% this year and analysts think it could hit 85 US cents next year
- Strong macroeconomic data and rising demand for Australian minerals have been boosting the local currency
- ASX-listed retailers, travel stocks and gold miners have generally benefited from the rising Australian dollar
- Healthcare, building materials and companies focused on overseas markets have been negatively affected
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If you've been doing your Christmas shopping online, you might have noticed overseas goods have become a bit cheaper of late.
The Australian dollar is hovering near a 2.5-year high, having breached 76 US cents twice in December.
The currency has climbed 7.2% so far this year with some forex strategists tipping it could hit 85 cents in a year's time.
While this is a good sign for our economy, the relationship between the AUD and our stock market isn't so straightforward.
What's behind the AUD rally?
The rally in "the Aussie" started around May, led by Australia's relative success in curbing the spread of the coronavirus pandemic and stronger macroeconomic data.
Surging iron ore prices in the later half of the year and solid demand for Australia's minerals from our top trading partner China also proved to be a tailwind for the AUD. A depressed US dollar further supported the rally.
More recently, growing hopes for a coronavirus vaccine have boosted the risk-sensitive Aussie dollar.
Currency impact on stocks
The question now is whether these levels are sustainable and, if so, what does this mean for ASX investors and their share portfolios?
In simple terms, a higher Australian dollar hurts exporters and companies that make money offshore while benefiting importers that end up paying less for their purchases.
A high and rising Australian dollar is also great news for international investors with exposure to Australia. Foreign investors tend to pour money into the biggest companies listed on the ASX such as Telstra, Woolworths and the top four banks – Commonwealth Bank, Westpac, National Australia Bank and ANZ Banking Group.
Here is a list of ASX stocks that are impacted by the higher Australian dollar:
Retailers
Importers, particularly retailers of clothing or electrical goods such as Wesfarmers (which owns Bunnings, Kmart and Target), Harvey Norman or Kogan are big beneficiaries of the rising currency as their costs decline and margins gain with a rising AUD.
Record low interest rates, generous fiscal stimulus and an under-control pandemic have already been boosting confidence for consumers, who are willing to go out and spend, also helping retailers.
However, a business's supply arrangements are critical in understanding the impact of the currency. For example, electronics retailer JB Hi-Fi Limited does not fully benefit from a rising currency as its suppliers deliver in Aussie dollars. Other retailers may have different hedging strategies and generally may not immediately benefit from a rising dollar if, say, the currency is hedged six months in advance.
Travel sector
Other beneficiaries include airline companies that buy their raw materials overseas such as fuel. Both Qantas and Virgin have seen a substantial drop in fuel costs and a potential reduction in the capital/leasing costs of aircraft.
Typically, travel-focused companies such as Flight Centre, Helloworld, Corporate Travel Management or Sydney Airport Holdings also benefit as a high local currency boosts overseas travel since it increases Aussie purchasing power in overseas currencies. However, given the current restrictions on foreign travel due to COVID-19, there are limited gains to be made this year.
However, for Australians invested offshore the higher Aussie dollar works against them.
Resources
Resource companies make up a significant part of the Australian stock market. So far this year, shares of BHP Billiton Limited and Rio Tinto Limited have risen sharply but that has been led by record-high iron ore prices and strong volumes.
A rising Aussie dollar will negatively affect the valuations of these mining giants; at this point, high US dollar prices have more than offset the currency effect. Nevertheless, a sustained rise in the AUD will begin to ultimately limit profitability of both large and small miners.
Continued volume growth and mine expansion also support the outlook for mining services companies and engineering groups such as Monadelphous Group Limited – which surged nearly 40% in November – and Fleetwood Corporation Limited. These companies have not been directly affected by the rising Australian dollar either.
Gold stocks
Similar to other resource companies, gold miners and explorers such as Newcrest Mining Ltd, Evolution Mining and Saracen Minerals tend to see a negative impact from a rising AUD since their costs are in Australian dollars but revenues are US dollar based. However, the price of a safe haven asset like gold moves inversely to the US dollar and so far this year, this has more than offset any impact of a stronger AUD.
Building materials
Two major companies that are also staring at a negative hit from the appreciating Aussie dollar are James Hardie Industries (JHX) and Boral Limited (BLD). The Australian building supplies sector is generally sheltered from the gyrations in the foreign exchange markets but both James Hardie and Boral have ventured into the United States.
Healthcare
Major healthcare companies such as CSL, ResMed, Cochlear and Sonic Healthcare typically earn a majority of their revenue in overseas markets and are therefore disadvantaged by a rising AUD which crimps their revenues and profit margins.
For instance, CSL earns less than 10% of its revenue in Australia, while over 50% is generated in the US; ResMed has over 60% of revenue coming from North America, while Cochlear has over 80% of revenue coming from outside Australia.
Overseas-focused companies
Like healthcare majors, a number of other ASX-listed companies are negatively exposed to a rising Aussie dollar because much of their operations are focused in overseas markets.
These include retailer Billabong International Limited, Computershare Limited, media giant News Corporation Ltd and QBE Insurance Group.
These are all major companies that also attract a constant flow of global index funds – which tend to buy shares based on market capitalisation rather than valuations. That means these companies will continue to attract fund flows, but it may not translate into share price outperformance as they will struggle to lift profitability at a time when the Aussie dollar is high and rising.
How to trade stocks
To trade in stocks impacted by the rise of the Australian dollar, it pays to understand what part of the industry you're most bullish about.
Once you've done your research and you understand the risks, you'll need to open a brokerage account. The platform you choose will depend on which market you plan to tap into. Planning on buying US stocks? You'll need to find a US broker, or an ASX broker if you're looking to buy Australian stocks.
Once you've chosen a share trading platform, you'll be able to search for the company name of your chosen stock or its stock code. Depending on the broker you choose, it might offer additional information about each company, including broker rating, price targets, dividend payments and debt-to-value ratio.
Another option is to profit from currency fluctuations by trading in foreign exchange. To do this, you'll need to sign up with a forex broker, such as IC Markets. You can read more about trading forex in our guide.
Trade with IC Markets
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