With the Australian dollar plunging to lows not seen since 2002, currency movements are set to have a profound impact on the operational results of various ASX companies. In fact, the AUD/USD exchange rate has declined as much as 25% in the last year, dropping from around 77 US cents a year ago to roughly 57 US cents at the time of writing.
As if the fallout from the Coronavirus wasn’t already significant for companies, a declining Australian dollar could weigh on businesses that import goods into Australia from ashore. However, investing in shares with exposure to the US dollar could offer distinct tailwinds when the Australian dollar is in free-fall. These shares are companies that typically earn in USD or report in US dollars.
Here are some of the key considerations when investing in shares with exposure to the USD, as well as some potential beneficiaries in a weak AUD environment.
Interest rate movements
As central banks around the world currently embark on providing what is almost an unprecedented levels of stimulus support, the Australian dollar has been caught in the crossfire as a currency susceptible to such movements.
Local rate cuts and quantitative easing were assumed by some as factors that would have been priced into the currency market, since these initiatives typically weigh on foreign exchange rates. However, the sudden escalation of economic instability due to the Coronavirus has brought forward these stimulus measures, and investors instead flocked to the USD as a safe haven currency.
Currency hedging and reporting
For companies that generate revenue in US dollars, or in fact report their results in USD, the upside comes from when this is converted back into a weaker Australian dollar. That is, at reporting time, the converted result is higher than it would have been if the Aussie dollar had not declined. With that said, however, it is quite common for large businesses to employ a currency-hedging strategy.
This helps explain why you will sometimes see assumptions within a company’s guidance outlook, where they will specify an expected range for the currency pair across the coming period. The intention of a hedging strategy is to ‘normalise’ the impact of any currency movements, albeit this can lead to a shortfall (or surplus) in potential gains that may have been possible were the company’s operations not currency-hedged.
One other thing to keep in mind is that companies reporting in USD will often declare their dividends in that same currency, providing some potential upside when investing in shares leveraged to the greenback.
Shares that benefit from a lower Aussie dollar
Some of Australia’s most well-known names are beneficiaries of a falling Aussie dollar. When you consider that Australia’s economy is particularly dependent on exports, this should begin to make more sense.
The iron ore miners often lead the way in this discussion, with BHP Group (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) all earning revenue from iron ore shipments that are priced in USD. With the greenback remaining strong against the Aussie dollar, their earnings receive a shot in the arm. Newcrest Mining (ASX: NCM) and Woodside Petroleum (ASX: WPL) are also in a similar position, with the price of gold and oil benchmarked in US dollars, meaning far greater revenue when translated into Australian dollars.
Beyond the miners, some investors opt to turn towards the healthcare sector when weighing up the idea of investing in shares that benefit from a declining Aussie dollar. ASX-listed companies like CSL (ASX: CSL), Cochlear (ASX: COH) and ResMed (ASX: RMD) have operations all around the world, earning a large chunk of their income in US dollars. In particular, the latter is dual-listed both on the ASX and NYSE, but with foreign exchange movements favouring the USD, investing in locally-listed ResMed shares would have delivered significantly greater gains for investors than the NYSE version.
There are also beneficiaries when it comes to manufacturing, with Altium (ASX: ALU), as well as materials businesses like Bluescope Steel (ASX: BSL), Boral (ASX: BLD), James Hardie (ASX: JHX) and Amcor (ASX: AMC) among those leveraged to a strong greenback, especially due to the large volume of sales they generate within North America.
What else should I consider before investing in shares leveraged to the USD
Although companies with exposure to a strong USD stand to benefit from FX gains, investing in shares solely because of this premise is a flawed approach. That’s because there are broader implications that relate to each individual business, insofar as their fundamentals.
Considerations might include things like debt levels, which can often be denominated in USD, as well as free cash flow, margins and other key criteria. At the end of the day, if revenue is materially down, it won’t make that much difference that a weak Aussie dollar has offset this.
What’s more, macroeconomic conditions can have a more profound impact than currency movements, just as we are witnessing amid the current pandemic crisis gripping the world.
In this respect, regardless how certain companies may see their operations benefit from a currency tailwind, one should always give appropriate consideration to the macro backdrop. While investing in shares with exposure to the US dollar can provide your portfolio with some hedging protection, your due diligence needs to be as meticulous as ever.
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