How low can the Aussie go? Exporters, tourism companies to benefit

Chairman, Wilson Asset Management
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In the wonderfully entertaining book “Investment biker”, legendary investor Jim Rogers makes the comment that when investing “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime”.

There is much wisdom in this comment and a reminder that the best thing to do when investing…most of the time…is nothing. I believe that most of our time is simply spent researching while waiting until compelling opportunities present themselves.

The double-edged AUD sword

And on that subject, I would like to talk about the Australian dollar (AUD). If there was ever a double-edged sword, it has been the prevailing strong Australian dollar for the last few years. On one hand, it has imported an element of deflation making goods cheaper whilst at the same time making outbound international travel more attractive. International travel has become extremely popular over the last few years. However, while consumers have been enjoying the benefits of a strong currency, exporters have been haemorrhaging due to a lack of global competitiveness with our exports being priced out of global markets. Also, domestically focussed industries have been buffeted by competition from cheaper imports in the domestic market…it’s not just exporters who suffer.

The AUD has been in a 13-year bull market since bottoming in 2001 at around US50c. It had a GFC hiccup in 2008 when it corrected back to around US65c, before moving into the parity range for the last couple of years. Recently, it has failed several technical support levels and gets quickly sold on any rally, and currently trades at US94c with extremes of volatility suggesting a change of seasons.

Damage is done

The key drivers of this prolonged strength have been somewhat of a perfect storm. We have been incredibly lucky to benefit from a once in a lifetime style mining boom that has fuelled large profits but even larger capital investments. These billions and billions of dollars have driven the currency higher, while keeping interest rates relatively high when the rest of the world was cutting hard in order to trigger a recovery post GFC, which Australia largely avoided.

However every boom busts and the party has finally ended and there will be a hangover. Mining capital investment as a percentage of GDP has peaked and is in rapid decline. China has boomed and is now moving strongly toward a lower growth consumer based society. The infrastructure spend as a per cent of GDP is declining and will continue to contract over the long term.

The subsequent damage of the prolonged high AUD on other industries will not be automatically undone by a falling AUD. As evidenced by the decision by Ford to cease manufacturing in Australia, much of the damage is terminal.

Labour laws in this country coupled with the high AUD have conspired to make us amongst the most expensive and inefficient economies in the world to do business, and these issues are hindering business start ups and capital investment by established companies. While a change in Government may lead to slightly more competitive laws, I suspect it will take real pain in the form of higher unemployment for politicians to make what may appear unpopular (but necessary) changes. The Australian work force has become complacent about how they work and what they get paid. I suspect it’s time for that to change and Australian workers to start paying for the good times we have had.

Slowdown solution

While the rest of the Western World have experienced serious recessions and are working hard to get back on a sound footing of positive growth, we in Australia are slowing. There is little to no preparation for our own slowdown.

The easiest solution to a slowdown is monetary policy. There is no political capital used in cutting interest rates and cut they will if growth continues to slow and unemployment starts to edge higher.

The interest rate differential that has fuelled so much foreign investment (the carry trade) in Australia is contracting, and that has had a material impact on the high yielding equity stocks selling off in the last month or so. Our banks stocks are down around 15%, reminding us that treating equity as debt is always dangerous as an investor. Even Telstra is down over 10%.

Aussie dollar outlook

The key drivers for a strong AUD have all changed except the AAA rating. Government debt is increasing, Government spending is declining, taxes are likely to rise, the mining boom has ended – all of these are contributing to slowing growth and lower rates.

As with any investment I look at the risk reward scenario: over the next 2 years I find it difficult to make a case for the AUD to go back above parity. I feel it’s highly likely that the AUD will revert back to long term averages of 70-80 USc and may overshoot on the down side.

Who will benefit

So who will benefit from a lower Australian Dollar?

Companies with overseas assets (News Corporation, James Hardie Industries), exporters (Australian Agriculture Group, Fortescue Metals Group and Atlas Iron Group) and tourism operators (Ardent leisure, Village Roadshow Limited and wotif.com Holdings).

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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