The impact of the AUD on Corporate Australia

Lost in the weakness over the past year for the Australian stock market has been the likely positives resulting from a local currency that is down around 35% from its highs only a few years ago. While part of that fall can be attributed to the tightening bias now adopted by the US Fed – although recent market weakness may now put an end to that – the big factor has been the unwinding of the resources boom which was the big reason why our currency ever exceeded parity against the US dollar in the first place.

Anyway, the point of this article is not to discuss the future direction of the currency but rather to consider the impact the current exchange rate is having on corporate Australia, particularly outside of the resources sector. With the vast majority of reporting season now behind us, the clear observation we can make is that corporate Australia is doing remarkably well in light of the global picture and the seemingly endless negative press we seem to read every day.

It is easy to forget that the US has navigated the road following on from the GFC with greater success than most developed economies, and the tool it used to do this was a lower currency. This made the country's exports look far more attractive and this was the main catalyst for the recovery, and it's no secret that the RBA's main goal has been to emulate that success.

Although we are only relatively early into a cycle of a lower currency, already we can see the effects flowing into currency sensitive stocks. Industries such as tourism, retail, and exporters have been reporting very strong profit numbers with optimistic outlook statements, and really this shouldn't have come as such a surprise.

The Australian retail sector has battled for years against a high currency while local shoppers enjoyed the greater choice offered by the internet and with prices often far cheaper when translated into Aussie dollars. Now that the currency has turned, names like Super Retail Group (SUL), The Reject Shop (TRS), Premier Investments (PMV) and JB Hi-Fi (JBH) have been recording strong sales numbers and are all trading within sight of all-time highs. Even David Jones has been recording strong sales growth under new owner Woolworths SA, and the currency is a big reason why.

A lower currency has also meant that Australia has become a far cheaper tourist destination, and we are seeing record numbers of international visitors from countries like China and Japan. Sydney Airport (SYD) is now trading at all-time highs whereas QANTAS Airways (QAN) stands out as one of the greater success stories on the ASX in recent years – an incredible turn of events after CEO Allan Joyce was asking for government assistance only a few years ago.

Exporters as well have found that the good times have returned as they generate their costs in Australia but are being paid in other currencies, most of which are now worth more in Aussie dollar terms. Companies like Resmed (RMD), Amcor (AMC), Treasury Wine (TWE) and Brambles (BXB) have reported very strong numbers over the past six months and that trend should continue.

The one area that we have only begun to see some real action is in the corporate activity space. Foreign predators are now able to buy Australian companies at firesale prices because of the lower currency, and with the exception of names like Asciano (AIO), Toll Holdings (TOL), Veda Group (VED) and Recall (REC) we really haven't seen the level of activity that we expect will eventuate. Given the promising numbers revealed during the last few weeks that trend may now start to kick in.