The AUD has sunk recently, and so which ASX sector and stocks would benefit the most. Picture Getty
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The recent turmoil in China has sent the Australian dollar into a tailspin, as it hurtled almost at a free-fall speed down to a US63c handle.
At the time of writing, the AUD was trading at US64.48c.
While the level is still far above the US58c we saw at the height of the pandemic in March 2020, the speed at which it’s fallen over the last few sessions has taken the market off-guard.
It has prompted banks like the CBA to issue a warning, saying that the AUD could fall below US60c this year if the Chinese economy continues to deteriorate.
NAB also came out and said it will revisit its AUD forecast following the latest development, after having predicted that it would go to US70c by year end earlier.
For the average Aussie, a lower AUD is really a double edged sword.
A weak Aussie dollar means higher prices at the petrol pump, as well costlier overseas holidays. It has also jacked up the checkout bills at international online stores like Amazon.
But for investors, a lower AUD could be beneficial as it helps the stock market given that we’re an export orientated economy.
“Generally speaking, a lower AUD may be broadly beneficial for Aussie stocks as it makes our markets relatively cheaper relative to other global markets such as in the US,” Emanuel Datt, founder of Datt Capital, told Stockhead.
The argument is that while a China-led global slowdown may hit our commodity exporters relatively hard, a weaker AUD can help those very commodities become more competitive elsewhere.
In addition, a lower AUD means that companies which are less China-dependent and have a significant share of their revenue derived from the US market could see their bottom line increase as they repatriate money back home.
“Indeed, sectors that benefit from a weaker AUD would be those that hold significant off-shore operations, or that are export-focused such as resources,” said Datt.
And if the weak Aussie dollar is sustained over a longer term, it can also stimulate local sectors such as inbound tourism and education.
On the flip side, sectors which would be adversely affected by a weaker AUD would be outbound tourism, and financials that are reliant on off-shore funding, says Datt.
Both the AUD and NZD are often seen by investors as a proxy for China because of the significant trade exposure between the countries.
These two currencies are often called ‘commodity pairs’ – a term referring to those currencies from countries with large amounts of commodity reserves. These also include currencies like Canada, Brazil, South Africa, and Russia.
China plays a major role on the movements of commodity pairs because of the country’s sheer demand for commodities.
For us, Australia’s dependence on China buying our iron ore and commodities means that what happens in China will directly impact the AUD, as is what’s happening right now.
“Markets are beginning to realise that what is happening in China is neither good nor temporary,” said currency expert, David Llewellyn-Smith.
“While the Chinese yuan plunges, AUD will too,” he added.
A plunging AUD could be a good thing, because it means stocks which have substantial operations overseas – where revenues are mostly collected in US dollars – are seeing higher converted figures.
The big miners for example, are benefitting from the weak AUD as most of their export contracts are in US dollars while costs are in Aussie dollars.
Investors meanwhile are benefitting from higher dividend payments in the local currency. Last week, investors in health stock CSL (ASX:CSL) were told they were getting a final dividend of US$1.29 per share, which when converted to the AU$ would be worth more at current levels.
Treasury Wine Estates (ASX:TWE) investors are also enjoying favourable foreign exchange rates. According to TWE’s latest update, adjusting for foreign exchange rate movements, its net assets have increased by $3.5m for the year.
Datt however says that investors should remain cognisant of their exposure to a fluctuating AUD that their investments hold.
“The impact of a poorly timed off-shore investment can be significant once you account for drift in foreign exchange markets,” he warned.
“But most Australian investors shouldn’t be too concerned about the value of the AUD, given they would be earning and spending in AUD.”
On the smaller end of town, stocks that earn most of their revenue overseas in USD include:
Volpara is a breast cancer diagnostics company that generate most of its sales from the US market.
According to the company, its software is used in over 35% of all breast cancer screenings in the US.
Volpara has recently won the global Healthcare & Life Sciences Partner of the Year Award, a recognition given by Microsoft and chosen from a set of more than 4,200 submitted nominations from more than 100 countries worldwide.
The BNPL company has its main market in the US, where its shares are also primarily listed on the Nasdaq.
In a Q2 release last week, Sezzle said its total income rose 19.4% on the pcp to US$34.9m.
The company had earlier said it was eyeing other international markets like Canada, Brazil, Europe and India.
Nuix has a lot of international clients on its books, which included US contracts with companies such as Airbus, Amazon, and American Express.
Nuix provides investigative analytics and intelligence software which allows clients to be ‘a force for good by finding truth in the digital world’.
In its latest update, Nuix says it revenue increased for the full year by 15.8% on constant currency, but was 19.8% when foreign exchange movement was included.
DUG specialises in analytical software development, big-data services and high-performance computing (HPC).
The company has a global presence, including offices in Perth, London, Kuala Lumpur, and Houston, US – with clients in the resource, government and education sectors.
Now read: Why the Aussie dollar matters, and which ASX stocks are exposed to its movements
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
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