Investors change focus with Australian dollar strength

Investors are becoming more aware of the potential for currency-related profit warnings in the local sharemarket.

Investors are becoming more aware of the potential for currency-related profit warnings in the local sharemarket.

The Australian dollar’s rise to a 33-month high near US78c this week has sharpened investor focus on the potential for currency-related profit warnings in the local sharemarket.

Jitters about potential US tax rate hikes stemming from an effective majority for Democrats in the US Senate in the event that they win both of the seats up for grabs in the Georgia runoffs was arguably the main drag on the local share market on Wednesday.

On Wednesday night (AEDT), multiple US news outlets had declared Democrat Raphael Warnock the winner of one run-off election, while the second remained too close to call.

But whereas S&P 500 futures fell as much as 0.7 per cent after the polls closed on Wednesday morning Australian time, the S&P/ASX 200 index fell as much as 1.4 per cent before closing down 1.1 per cent at 6607.1 points on relatively heavy volume, with all sectors bar Energy and Utilities in the red.

US 10-year Treasury yields jumped 6 basis points to a 10-month high of 1.01 per cent and 30-year yields rose 7 basis points to 1.78 per cent on the chance of more bond issuance in a “blue wave” scenario.

It’s worth noting that companies exposed to the Australian dollar, along with a number of “high PE” stocks were among the hardest hit in the local market as the Aussie dollar crept up to US77.88c.

After diving 22 per cent as the pandemic hit at the start of 2020, the Australian dollar has jumped 42 per cent amid surging iron ore prices and massive US dollar liquidity from the Federal Reserve.

The Aussie rose 11 per cent in the second half and 7.3 per cent in the fourth quarter.

Among heavyweight companies that are exposed to the surging currency and don’t have an offsetting tailwind from surging commodity prices, CSL fell 2.5 per cent, Macquarie Group fell 2.4 per cent, ResMed dived 1.8 per cent, Amcor tumbled 2.5 per cent, Aristocrat lost 1.6 per cent, James Hardie fell 4.1 per cent and Ramsay Health Care fell 2.5 per cent on Wednesday.

“With the February reporting season now just a month away, it looks like some are realising after we saw recently with the Appen profit warning…the stronger exchange rate will see most of the Australian dollar-related stocks come in with lower profits,” said Bell Potter’s head of institutional sales and trading, Richard Coppleson. “Thus some were selling and shorting those stocks now.”

Mr Coppleson also noted that the high PE stocks were hit hard – possibly on the back of some investors “selling their winners and switching to maybe gold, oil or resources”.

The high-profile trader predicted that 2021 will be a year where commodities and resources stocks excel in what may be the early stages of a “commodity super cycle”, based on the fact that the S&P GSCI commodity index was now at a record low relative to equities.

Interestingly enough, Citi downgraded Amcor to Neutral from Buy while trimming the price target by 5.6 per cent to $16.80 after a strong rise in the share price and the Australian dollar since March.

“While we like Amcor’s attractive dividend yield, balance sheet flexibility, and high-quality portfolio, following the positive move in the stock in the second half of 2020, there is less upside to our target price,” Citi analyst Craig Woolford said in a report.

“Our move to the sidelines further reflects a preference for Packagers with more cyclical exposure in 2021 (as) about 96 per cent of Amcor sales to food and beverages and other consumer markets, with limited industrial exposure.”

But he’s still assuming 12-month forward PE multiple of 12.5 times - a premium to Amcor’s historical trading average - reflecting multiple expansion in the broader market as well as opportunities for returns and earnings growth with the integration.