Citi: Offshore industrials set to fire

Here’s a theme dear to my heart from Citi today:

• A surprise — One of the more unexpected moves in local markets this year would seem to be the strengthening in the AUD, particularly after the RBA’s focus on it last year. Citi’s forecasts, from our currency analysts in London, envisage the rebound in the AUD being broadly sustained, against a backdrop of a mildly strengthening USD globally. But as far as the risks to this go, given the uncertainties around currencies, most would probably agree they seem more to the downside, as Australia’s terms of trade likely decline further and growth picks up in the developed economies.

• Shifts abroad — Interestingly, despite the likely uptick in growth in aggregate, the developed economies seem to be on more divergent paths for monetary policy. As the Fed likely phases out QE this year, after the BOE earlier, the BOJ is expected to step up QE further, and Citi economists now also see a good chance the ECB introduces QE this year. With the potential implications of this for currencies not obviously reflected in markets, Citi forecasts envisage the USD and GBP rising against the JPY and EUR this year, and this complicates the outlook for the AUD.

• Back at home — The likelihood in this context, or at least the risk, seems to be the AUD could fall against the USD and GBP, but possibly not JPY and EUR. For local equity portfolios, these sorts of moves could clearly be important, given the share of market earnings from abroad, and the significance of “offshore” industrials and resource stocks. The prospects suggest a focus more on USD and GBP earnings, which are concentrated in industrials like JHX, IPL, HGG, ANN, NWS, ALL, and CPU, and less in those more diversified offshore like BXB, AMC, MQG, and CSL.