by Chris Becker
A circa 6-7% correction in the ASX200 from its recent top, wiping out all the nominal (but not dividend income) gains for 2014 gives rise to the question of potentially finding value to re-enter the market. Further, the larger falls in the Aussie dollar, which now appear to be structural and not part of normal volalitity makes us consider those now cheaper stocks that are going to benefit from the lower “battler”.
AUD-exposed industrials has been a long held theme for MB as it was readily apparent from the macro forces at play that the Aussie dollars level above parity was unsustainable. Those businesses that re-structured and weathered such a high currency environment will feel the spoils of their sacrifices, while others will now see vastly increased input costs and/or compression in margin based on their import-heavy business models.
First of all, lets eliminate most of the retailers – not just on their increased import charges, but also the lower economic demand around the country and a rising unemployment trend that will curtail discretionary spending.
Next off the radar are the banks – or Megabank as we call the almost indistinguishable ANZ, Commonwealth, National and Westpac oligopoly. All but Commonwealth are going ex-dividend in the coming month, and although the fully franked yield does top 10%, capital losses ahead could wipe out these income gains. This is not a problem if a long term, income bound investor (with a large appetite for intra-month or intra-year volatility), but fundamentally the banks are weaker going forward due to their offshore dependence on funding which is increasingly under threat with a lower AUD.
Then there is a mixed bag, namely those stocks who report a lot or somewhat in foreign currencies, yet their fundamentals maybe under question. I would put Westfield (WDC), QBE Insurance and Newscorp (NWS) in this pile.
The standouts for mind are mainly healthcare stocks, including Resmed (RMD), Sonic Health (SHC), Ansell (ANN), CSL and Cochlear (COH)
Others include Boral (BLD), Brambles (BXB) and James Hardie (JHX) for those interested more on the construction side of the equation (particularly in the US).
More speculative bets include domestic gold producers, particularly Newcrest (NCM) as a natural hedge against the weakness in gold (priced in USD) although higher production costs could offset the increased margins, particularly for the juniors.
While most of these still seem quite expensive, the relative performance should exceed the remainder of the market as the AUD continues to fall or even stabilise at newly found levels.
Finally I should warn that given the AUD is seen as a “safe harbor” currency, more volatile falls in the currency could see a greater unwinding of foreign held share assets, which may translate into continued falls in the ASX200. Prudent risk management and the right position sizing will always win out here over individual stock selection, which could just be a value trap.