High dollar hurts big end of town

While the high Australian dollar may be great for buying goods off the internet and taking that well earned international holiday, a high $A is about to hit home for our large corporations.

Any company earning all or part of their income in US dollars is potentially affected — this makes up 35 to 40 per cent of companies on the ASX.

Companies with large off-shore exposure, such as CSL, QBE, Worley Parsons, Computershare and Westfield will be affected as they deliver lower $A earnings, which can potentially translate to lower $A dividends.

Single commodity exporters whose contracts are in $US such as Bluescope Steel and Onesteel are also on the receiving end of a high $A, as are Incitec Pivot, CSR and Paperlinx.

There’s a second risk to the markets — international money is flowing out of the system at current levels, which has a negative effect because it brings with it a weight of selling.

Take, for example, May last year during the height of the Resources Super Profits Tax debate and the end of the Kevin Rudd era.

For the brave international investor the $A was trading at 82c versus the US, and there was ample opportunity to buy BHP at or below $37/share.

On Monday, BHP closed at $46.13, with the $A at $1.10. This is a cool 24 per cent profit on the stock, with a 34 per cent profit on the currency exchange.

There aren’t many international investors who wouldn’t be happy with a 58 per cent profit in 12 months on the number one blue-chip stock on the ASX.

With money flowing out of Australia, and the $A still going up, there must still be someone buying the dollar. Word on the street has it that this buying is coming from Asian central banks, as they attempt to diversify their foreign reserve currencies after holding a heavy reliance on the $US.

With concerns over continuing weakness of the $US, the banks have begun to act and the switch is on.

Looking forward, the Australian reporting season kicks off in August.

With the high $A starting to put the brakes on the local economy, we’re entering the period where analysts and companies alike will start to announce profit downgrades for those companies with severe exposure. This is a space to watch over the coming months as the news is fed into the market.

For more information, contact Cameron Bartram at Sentinel Stockbroking on 9225 0028 or email cbartram@sentinelgroup.com.au

Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making investment decisions. Sentinel may hold positions in stocks discussed from time to time.