1. How low can the Australian dollar fall?
It certainly has been a choppy ride for the Australian dollar. Back in September 2015, the Australian dollar fell to a new six-year low of $US695 cents, just shy of the psychological $US70 cents threshold. Quite a few analysts are predicting that the Australian dollar could fall to $US60 cents. Switzer Daily expert Shane Oliver admits that he “doesn’t have a clue how low the $A will go” but he reckons that “in the context of commodities being in the long-term downtrend, the Australian economy struggling and the interest rate gap in favour of Australia likely to narrow further, the $A has a lot more downside.”
This year has already seen the Australian dollar plunge amid concerns over China’s growth outlook, falling commodity prices and US Federal Reserve rate outlook. It is still trading at around the $US 70 cents mark but expect a bumpy ride ahead.
Implications for investors
Investors can benefit from a falling Australian dollar by investing in companies with overseas earnings. Australian stocks that have large US-dollar revenues and earnings include the healthcare companies CSL (CSL), Cochlear (COH) and Resmed (RMD). Companies like James Hardie (JHX), Brambles (BXB), Amcor (AMC), Macquarie Group (MQG) also derive a large portion of their earnings from offshore.
2. The China syndrome
The year did not kick off well for China, with the world’s largest economy reporting weak manufacturing data. Concerns about Chinese economic growth sparked falls on major markets around the world. The decision by China to depreciate its currency and halt trade in Shanghai stocks for the second time in the New Year added to market turmoil.
The economic outlook for the country is worrying. Growth in China is now projected at 6.5% in 2016 and 6.2% the following year, according to the Organisation for Economic Co-operation and Development (OECD).
Peter Switzer notes that there is too much of a focus on manufacturing, which will become less important as the Chinese economy transforms into a greater services economy.
Implications for investors
China’s mining boom may have eased but the country has an insatiable demand for food. We have already seen a stellar performance in companies such as Blackmores (BKL) and Bellamy’s (BAL) who have both benefited from China’s ‘dining boom’. Companies like Bega Cheese (BGA) is also set to do well, having secured a joint venture with Blackmores to become a supplier for a range of foods, including infant formula.
3. Income the focus but dividend sustainability is the key
Income will remain a big focus for retirees in 2016, particularly given the paltry cash rates still on offer. With low rates, investors, particularly retirees remain attracted to Australian companies offering high dividends. In fact, the banks and Telstra (TLS) remain the “darling” dividend stocks. According to data from FN Arena, the banks are expected to deliver in fiscal 2016 an average grossed up yield of 8.4% – ANZ the highest at 10%. The issue is that these juicy dividends come out of company earnings and therefore may not be certain. A big question therefore is: can these darlings still deliver?
Telstra’s share price performed rather poorly in late 2015, after it failed to meet analysts’ expectations for its full-year results. Weak economic growth and capital-raising pressures also confront the banks. Despite these challenges, the four majors have still managed to increase their payout ratios. Some brokers argue that the banks may have to review their dividends, with Morgan Stanley noting that “the probability of a dividend cut is rising”.
Implications for investors
Paul Rickard believes Telstra will maintain its growth, as it plans to make the necessary investments to become a world-class technology business, not just a phone company. Barring some “black swan event”, he says Telstra shareholders can have a high degree of confidence that they will get a fully-franked dividend of 31.5 cents per share, maybe even 32 cents per share in the fiscal year 2016.
Capital raisings have impacted banks, however, they have passed the costs on to their customers via out-of-cycle interest rate hikes. Paul Rickard notes that the banks are keeping a very tight control on costs. While economic growth challenges remain, unemployment is not about to explode and there is still no risk to bad debts. Investors can still keep their faith in dividends for the fiscal year 2016.
4. Commodity and energy prices
An oversupply spurred commodity prices to tumble in 2015. Oil prices fell from $US54 a barrel to below $US37, iron ore from $US68 a tonne to under $US39 a tonne and copper from $US285 per pound to $US207 per pound.
Paul Rickard and Switzer Daily expert, David Bassanese, do not believe prices have bottomed – let alone started to find a floor.
Tepid growth is only part of the reason for weak commodity prices – the issue is largely due to overproduction.
“The belated lift in supply in recent years – just as demand from China has slowed – has led to a progressive slump in prices over the past four years, that as yet shows little sign of abating,” Bassanese says.
Rickard notes that production is starting to pare back but the question will be how quickly supply and demand get in balance again.
Implications for investors
It’s going to be tough going for resource and energy companies. Long term investors who can ware some pain should acquire cautiously, but otherwise, most investors will remain underweight resources. The low oil prices, however, will benefit other sectors. Low oil prices generally mean a rise in consumer spending in Australia so expect consumer stocks to benefit from this price rout. As Peter Swizer notes: “lower oil prices are giving the global economy a massive tax cut and business cost cut that should actually be a plus for economic activity.
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