More On Aussie Stocks And The Aussie Dollar

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This story features BLUESCOPE STEEL LIMITED, and other companies.
For more info SHARE ANALYSIS: BSL
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

This article follows on from yesterday's Aussie Stocks And The Aussie Dollar.

Citi analysts' estimates of potential downgrades to Australian corporate earnings in the current financial year as a result of the strong Aussie dollar amount to only a net 2%. FY11 is now all but over however, and thus contemporaneous FY12 earnings downgrades could take total reductions to a net 5%, the analysts warn. Such downgrades will make it difficult for the ASX 200 to move much above 5000 in 2011 and even after assuming a slightly better market multiple (PE ratio), Citi sees 5250 as about as good as it might get.

The problem is not about to go away, as Citi sees those factors driving the Aussie – higher commodity prices, higher interest rate differentials against other economies and a weak USD – not likely to reverse in the short term.

Deutsche Bank concurs with Citi's 5% earnings downgrade estimate, going a step further to suggest 5% “plus”, and notes that the Aussie's sudden and surprising spurt is more a product of weakness in the US dollar than anything else. The Aussie has also risen steeply against its trade-weighted currency index, reflecting the extent of trade with those countries which have not let currency pegs revalue against the USD (eg China). By contrast, increases against the euro and pound have been modest.

Macquarie points the finger at Japan. As noted in yesterday's article, the Bank of Japan and G7 were forced to intervene in the yen post the earthquake. The intervention was intended to stem the tide of a rising yen as offshore risk investments flowed back home to Japan where it was needed, but Macquarie believes that intervention has “restored the yen carry trade with a vengeance”. Last month's surge in the AUD was “atypical”, says Macquarie, and not reflective of the “normal” drivers of increasing risk appetite, improving global growth outlook and expectations of rising commodity prices.

Macquarie lists those stocks as having the greatest downside earnings risk from currency appreciation as Gunns ((GNS)), BlueScope ((BSL)), Aristocrat ((ALL)), Redflex ((RDF)), OneSteel ((OST)), Incitec Pivot ((IPL)), Ansell ((ANN)), Mineral Resources ((MIN)), ResMed ((RMD)), Boart Longyear ((BLY)), QBE Insurance ((QBE)), News Corp ((NWS)), Campbell Bros ((CPB)), PaperlinX ((PPX)), Brambles ((BXB)), Computershare ((CPU)), James Hardie ((JHX)), CSR ((CSR)), Orica ((ORI)) and Spotless ((SPT)).

In terms of beneficiaries, Macquarie can name just three – Qantas ((QAN)), Virgin Blue ((VBA)) and Boral ((BLD)). 

Deutsche Bank has gone the other way and identified those companies with cross-currency exposure in earnings, meaning the euro and pound, which thus provide some buffer against any USD-related losses. They are Brambles, Billabong ((BBG)), Amcor ((AMC)), Lend Lease ((LLC)), Westfield ((WDC)), CSL ((CSL)), ResMed, Cochlear ((COH)), Sonic Healthcare ((SHL)), National Bank ((NAB)) and Computershare.

Noting that the Aussie has outpaced upward moves in commodity prices lately (as discussed by Credit Suisse in yesterday's article), Deutsche concedes that resource companies, or one third of the Australian market, are due downgrades. Credit Suisse yesterday identified those resource sector companies reporting in USD, and thus not impacted in actual earnings reports, and today Deutsche has looked at industrials which, by virtue of debt carried in USD or through their currency hedging programs have reduced exposure. They include Goodman Group ((GMG)), Boral, Leighton Holdings ((LEI)), WorleyParsons ((WOR)), Transfield ((TSE)), Cochlear and Westfield.

Citi notes the biggest earnings downgrades will be reserved for those companies with the largest exposure to USD earnings, being stocks in healthcare, retail, media, transport and gaming. Those with potential for earnings increases include resources (reporting in USD) and the banks.

In the case of banks, it should be noted that while the sector is almost entirely domestic (but for NAB's UK exposure and ANZ's push into Asia), any impact on the Australian economy via the currency drag will be ultimately felt through lower credit demand and possible bad debt increases locally.

Domestic retail would once upon a time been revelling in a strong Aussie given the reduction in import costs and available boost to margins. But this time the strong Aussie is sending shoppers offshore on-line, and price inflation through sheer oversupply has hit all sorts of items like televisions that would otherwise have seen a stampede from shoppers eager to cash in. Anyone who wanted a new tele but couldn't afford one went and bought one in 2009 when Rudd was buying.

Note, nevertheless, that on April 21 the ASX 200 hit 4913. Having since been hit with significant currency-related selling it is (at the time of writing) 6.5% below that level.
 

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