Whatever You Do It's The Rise In The Dollar That Counts

Sydney Morning Herald

Saturday February 14, 2004

Peter Weekes

Forget the free trade agreement and its promise of lower tariffs, it's all about the Aussie dollar. With the currency still rising and not expected to abate until it peaks around mid-80c by June, retail investors are faced with a challenge.

While cyclical sectors such as resources, media and retail should perform well for investors, ``for globally focused companies, the higher Australian dollar crimps their outlook for profitability", says CommSec's senior analyst Craig James. Profits translate to higher share prices, dividends and buybacks.

Despite numerous profit warnings, this reporting season for the first-half of this financial year has unveiled stellar performances, from Commonwealth Bank's $1.24 billion to Telstra's $2.3 billion and News Corp's $1.14 billion. The ``fear" holding back the market has dissipated, says AMP Global Investors head of strategy and chief economist, Shane Oliver.

Though the Australian sharemarket has returned only 1 per cent this year, since mid-March it has risen 22.3 per cent. The Dow Jones is up 41.5 per cent. The Australian economy is strong and the ``Goldilocks" US economy not too hot, and not too cold is also ``just right", with the Federal Reserve saying this week it would be patient about any further rate rises. European and Asian economies, particularly China, are also gathering pace - all in a low inflation environment.

Normally in the early stage of an economic recovery, it would simply be a matter of jumping into any cyclical stock and watching your investment grow. The strong Australian dollar, which yesterday reached US79.21c, has put paid to that, with most local cyclical stocks, such as mining, having a large exposure to overseas currencies, whether through offshore subsidiaries or exports. The Australian dollar has been the main beneficiary of the weak greenback, gaining more than 30 per cent in the past year.

Macquarie Equities' divisional director Lucinda Chan says we are ``living in tricky times" with both local earnings and the Aussie rising fast, and the unknown effect of more interest rate rises hanging over the sharemarket. Still, few are predicting more than a quarter of a percentage point increase in March or April, before the Reserve Bank adopts a more ``neutral" stance.

A Bloomberg News survey of 23 economists, showed 19 expect the rise by mid-year; 12 say next month.

``There are certain sectors," Oliver says, ``where there is very little offshore exposure, like the banks [financials] and retail. Then of course you have resources, which are heavily exposed, then you have those in the middle like building materials, where you have to look company by company."

Resource stocks, such as mining and coal are in great demand, particularly steel in China. Last year, that economy recorded 9 per cent growth. ``Obviously, the resources sector is heavily exposed to the US dollar, because the bulk of their earnings is offshore, but you can't simply say, `Let's avoid resources because they are also getting the benefits from strong global growth and high commodity prices'," Oliver says. ``It is an environment where we would favour cyclicals, given the global recovery is still unfolding. We see that remaining until global interest rates start to raise . . ."

To be sure, the currency has also helped sectors like retail. David Jones, Coles Myer, Harvey Norman and other retailers benefit from a fall in the price of consumer items, as it allows them to pad their margins.

Still, consumer are happy, with the latest survey putting confidence at a 9 1/2-year high, so we are spending like never before. Figures from the Australian Bureau of Statistics reveal consumers spent freely before Christmas, pushing retail trade up by a robust 1.4 per cent in November to $15.8 billion.

``The purchasing power of consumers continues to increase, wages are rising, but the costs of staple goods are not rising anywhere near the same extent, so there are extra dollars in people's pockets. This is positive for Myers and David Jones, less so for food," CommSec's James says.

Some media stocks may also do well, with advertising sales well up. Chan favoured News Corp even before this week's profit announcement but not Fairfax. ``Display advertising has strengthened for newspapers and television, but classifieds are weak," she says.

``News Corp is the biggest stock in town. Fox Television is doing well, they have Sky Italia and a growing DVD market and film; that is where their money is coming from now."

Still, citing recent results by Rural Press and West Australian Newspapers, Steve Allen, managing director of media buyers Fusion Strategy says classifieds are rebounding and further growth is expected in employment, motoring and real estate ads.

The reporter owns Fairfax shares.

© 2004 Sydney Morning Herald

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