Our “US$ Earners” (which make up 17% of the ASX200 market cap) have continued to outperform the broader market this year despite a moderately stronger AUDUSD, posting an average return of 13.7% versus 3.1% for the ASX200 over the last six months. The decoupling of the trade from the A$ is interesting and would appear to suggest that equity investors are more bearish in respect of the domestic economy and more bullish on the US$ economy than their FX counterparts.
Is It Just Stock-Specifics Driving US$ Earners Outperformance?
There is more to US$ Earners performance than just macro issues as we can find a fair degree of support for the trade from the current state of bottom-up fundamentals. With the A$ relatively range-bound, investors may simply be following the superior earnings momentum of the US$ Earners. The superior “quality” of companies among our US$ Earners may also be a consideration as evidenced by the skew to areas like health care and as evidenced by the long-term earnings outperformance from the subset.
Crowded Perhaps – But Macro & Micro Both Continue to Support US$ Earners
While the US$ Earners look somewhat expensive, the logic of overweighting US/foreign currency earners appears sound from a top-down and bottom-up perspective, with the domestic economy and earnings backdrop constrained and our bottom-up view of upside risk to consensus in a number of US$ Earners. Our view of downside risk skew on the A$ and the possibility of a US corporate tax cut offers additional optionality. We continue to overweight US$ Earners within our model portfolio (they comprise around 28% of our model portfolio).
Long term readers will recall that this has been MB’s favourite equity allocation since 2012. Today it constitutes the vast bulk of the Australian allocation of the MB pilot fund. Although it looks expensive today, consider that a 20% fall in the AUD would effectively send that P/E to its lows.
The MB fund is launching July 1st (though given that is a Saturday, it’ll be July 3rd). However we are beginning to on-board early registrees next week. Sign up today:
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
