News that today's key consumer price inflation data came in below expectations and well below the Reserve Bank of Australia's targeted 2%-3% range suggests that another rate cut and weakening Australian dollar is a possibility in 2017.
The headline inflation numbers were up 1.5% over the year and 0.5% over the quarter which will put more pressure on the Reserve Bank to act to lift inflation by cutting borrowing rates and increasing the availability of money.
Although the new governor of the RBA is on the record as stating he is prepared to tolerate inflation below its targeted range to a certain extent, Australia now looks only one more disappointing inflation print away from potentially forcing the governor into action.
If another cut does come I expect the Australian dollar will cop a real hiding as FX markets are not currently pricing in a cut and the U.S. dollar is expected to receive support on the back of rate rises in the U.S. in 2017.
Investors expecting a rate cut then should look to high-quality Australian stocks with strong leverage to a falling Australian dollar. Below I have four of the best.
ResMed Inc. (CHESS) (ASX: RMD) just yesterday announced a strong quarter of revenue growth and steady margins. The sleep treatment business reports and pays dividends in U.S. dollars, which means Aussie investors are direct beneficiaries of US dollar strength.
Altium Limited (ASX: ALU) is the San Diego-based software parts designer that also reports in US dollars. It is growing at double-digit rates and has exposure to the fast-growing Internet of Things market, which means it looks an exciting bet for the future.
Magellan Financial Group Ltd (ASX: MFG) is the international equities manager that is trading on a reasonable valuation below $23.60. The majority of the assets it holds are priced in US dollars, while its costs are mainly in Australian dollars. A free-falling Aussie dollar over 2017 would give it a big boost.
Macquarie Group Ltd (ASX: MQG) is the financial services business that is fast morphing into an asset manager. A cut to interest rates in Australia would likely lift asset prices and the bank's substantial overseas earnings benefit as the local currency falls.
All four of the above look reasonable prospects to me on current valuations, although recent run-ups in their share prices mean they are not bargain buys as such. Still, if Australia does see another rate cut in 2017 I expect their share prices will deliver some solid growth.
