According to some foreign exchange experts, the Australian dollar is set to hit US70 cents in the near future – the currency has recently hit a new 52-week low of US73 cents. That's a far cry from where it was just 12 months ago, when the Australian dollar was buying around US93 cents. The decline in purchasing power suggests some companies will enjoy a substantial tailwind and others a substantial headwind.
For companies with overseas operations or even domestic firms who buy and sell goods or services in foreign currencies, a significant swing in an exchange rate can have a dramatic effect on their profitability. Given that the Australian-US dollar swing has been approximately 20% over the last year, it's important that investors consider the ramifications for stocks.
One group of stocks which should stand to benefit from a weakening domestic currency are companies which report in US dollars. Two such companies, Amcor Limited (ASX: AMC) and QBE Insurance Group Ltd (ASX: QBE) should benefit from a translation effect when domestic investors price their stock in Australian dollars. The key with this scenario is to understand what percentage of earnings is derived from which currencies. For example, both companies also have substantial European operations and investors need to consider what impact this has on US reported earnings too.
Companies with significant overseas operations also stand to benefit from earning US dollars which they can then repatriate back home, enjoying the better conversion rates that the weaker Australian dollar provides. Cochlear Limited (ASX: COH) and Sonic Healthcare Limited (ASX: SHL) are two companies that generate significant US dollar earnings which ultimately are repatriated to shareholders in Australia.
With the August reporting season nearly upon investors, identifying stocks with positive earnings momentum and the potential to surprise on the upside is key. The thematic of a currency tailwind is certainly worth exploring.
