The impact of the high Australian dollar is becoming a feature in broker forecasts and broker sentiment. Southern Cross, having blamed the Federal government for all Australia’s problems, now seems to believe that some of it is due to the high currency. Perhaps they have woken to the joys of reading MacroBusiness. A Southern Cross report today says that the $A has become a “genuine headwind” for a variety of reasons. It points out that few companies are hedged against the high currency, they simply have to struggle with the consequences.
What usually happens is listed management teams “hope” for a pick-up in trading conditions but at the end of 2/3rds of the financial period they realise their budgets and therefore guidance can’t be met. They then blame everyone but themselves for the downgrade. You can look forward to the high Aussie dollar, weak household sector, savings rates, the internet, interest rates, the Government, natural disasters, weather, inflation and commodity prices getting a lot of blame over the next few weeks for lowered industrial cyclical expectations. All factors we have mentioned in these notes over the last six months, but particularly in our lonely bearish stance on discretionary retailers which we maintain today (next leg down coming in disc retailers, just look at the awful HVN, MYR, DJS charts).
But it gets even trickier, because this isn’t only about industrial stocks struggling with the weak domestic economy. This is also about downgrades for foreign earning Australian industrial stocks. Again, very few companies would be using 108usc in their 2H FY11 budgets, particularly if they had listened to the consensus bank forecaster view of where the AUD was headed. While the AUD has averaged 102usc since Jan 1st, the point is at today’s prices the earnings conversion damage starts getting exponential. I would suspect many Australian companies would have simply used in their budgets the consensus AUD view for 2H FY11 which was around 95usc.
Deutsche Bank has started to factor the high $A into profit expectations. It has a sell recommendation on Incitec Pivot after reducing its earnings forecasts by 3-6% because of the currency (although it maintained its price target). It also has also downgraded its earnings forecast by 2-3% for Orica, although it has a buy on the stock.
Deutsche is not altering its expectations for Resmed, which has more of a global platform, with operations in Singapore. Plus Resmed is hedged.
The FX translation impact in Q3 should be negligible given the US/EUR was relatively flat on the pcp, but a hedge gain of US$2m+ is likely due to the recent strength on the A$.
Goldman Sachs is bullish on the supply demand balance for Australian equities, arguing that that the supply has been reduced because of an easing of equity raisings (placements and issues). They argue that the market is returning to “normal”. But what is happening with the currency is far from “normal” and is likely to skew the market even more towards mining and away from the weak half of the two speed economy. The damage to Australia’s industry base is likely to be generational.