Any investor has to be aware of the effects that changes in currency exchange rates could have on their investments.
There is little doubt that interest rates around the world will start to rise. And once that starts to happen the value of the Australian dollar will fall.
That will be good for those who hold international investments such as overseas-listed shares. Most investors do not access overseas shares directly but through a fund manager or through ASX-listed exchange traded funds that track overseas markets, including sharemarkets.
Provided these funds are not hedged back to the Australian dollar to remove the exchange rate risk, a fall in the value of the Australian against the US dollar, for example, would add to the performance of US share prices. However, there would also likely be some winners among Australian-listed companies.
It may give those DIY fund trustees, for example, some ideas outside of high-priced shares, like the big banks and other high-dividend payers they favour.
One of Australia’s most astute investors, John Abernethy, the chief investment officer at fund manager Clime Asset Management, reckons the biggest beneficiaries of a lower Australian dollar against the US dollar would be those Australian-listed companies with significant US operations.
Abernethy’s view on the Australian dollar is similar to that of most analysts. He reckons the commodity price boom is over and the period of record-low interest rates that has helped support the Australian dollar is coming to an end, which will see the local currency weaken.
Abernethy expects that over the next two years the Australian dollar will fall to just under 80 US cents from just over 90 cents now. He says the winners would include Australian-listed companies with big US operations such as CSL, Resmed, Westfield, James Hardie and Computershare.
Their US profits would be worth more when translated back to Australian dollars, he says. He is not expecting the Australian dollar to fall by as much against the euro as against the US dollar.
“European-exposed stocks such as Amcor and Ramsay Healthcare will also benefit but not to the extent of US-centric stocks,” Abernethy says. He says some domestic retailers could benefit from a weaker Australian dollar: Australian consumers, faced with higher prices from overseas online retailers, would buy more from domestic retailers.
Offsetting that is that retailers’ overseas inventory would be more expensive. However, many retailers that import inventory hedge for currency for a year ahead, during which time any changes to exchange rates do not affect them.
Resources companies, such as BHP Billiton, Rio Tinto and Fortescue Metals Group, could benefit. But Abernethy says other factors, including the volume and price of exports, affect resource stocks and investors cannot assume they would be winners if the Australian dollar were to fall.
“Resource stocks should be a net beneficiary [of a weaker $A] but you can’t predict it.”
Of course, there are many offer factors that need to be considered in picking Australian shares. No one would select an investment on currency exchange rate factors alone.
By: John Collett, Sydney Morning Herald