There is a sea change underway across the Australian investment landscape, and investors need to be ready to capitalise on the emerging new trends.
For starters, the Australian dollar finally appears to be responding to commodity fundamentals and is heading south. Last week it broke critical short-term resistance at US92c, and quickly slipped below US90c. With the United States economy getting stronger and inching toward higher official interest rates by early next year, the $A likely faces further downward pressure.
Weakness in the Chinese economy and commodity prices only adds to the downside pressures on the $A. Although talk of gloom is probably a stretch, China’s property market does appear to be going through one its regular cyclical slowdowns. After a strong run up in house prices, they are now falling back again and home sales have also dropped. I expect conditions to cool down for a time and then fire back up as the Bank of China eventually eases back on credit restrictions.
China’s effort to re-balance its economy from an over reliance on pollution producing heavy industry toward services and consumer spending is also reducing its once frenetic demand growth for coal and iron ore. At the same time, our miners are ramping up production, while higher cost Chinese iron ore producers remain reluctant to quickly cut back their own output. It’s little wonder coal and iron ore prices are heading south, and more quickly than most analysts imagined.
A weaker $A should bring some relief to many parts of our hard pressed trade exposed sectors, and further undermines the chances of more interest rate cuts to support the economy. Indeed, if the $A heads to around US85c or lower by early next year, Australian may well even face interest rates hikes by May or June 2015.
What does this mean for the market? A shift in the mix of monetary conditions – a weaker $A but higher interest rates – should tend to favour outperformance by resources relative to financials. Given BHP-Billiton and Rio are among world’s most diversified and low cost commodity producers, they’re a likely to win out as low prices eventually drive other high cost producers out of the market. The falling $A will also at least partly offset the loss in $A revenues produced by weak commodity prices.
Meanwhile, flat to rising interest rates and worsening home affordability should soon see a slowing in housing credit growth, which together with likely higher capital requirements makes the banking sector’s earnings outlook somewhat challenging. The smart money may well be thinking BHP-Billiton could outgun CBA in terms of share price performance over the next one to two years.
But while the resources sector faces the challenge of weak commodity prices to overcome, there are other even better placed local companies that will benefit from $A weakness – those with decent exposure to non-mining related offshore markets, especially in the United States.
Some names that spring to mind include health care stocks such as CSL and Resmed. And Westfield, James Hardie and Computershare are also known for decent US earnings exposure.
And there’s arguably an even better way to benefit from $A weakness – invest directly in foreign stocks. These days, this is most easily achieved through buying an unhedged international equity exchange traded fund (ETF) – Vanguard’s US equity ETF (ASX Code VTS) is the cheapest, with a management expense ratio of only 0.05%.
And for those that prefer a higher yielding US play, BetaShares has just launched “UMAX”, an fund that also trades on the ASX and passively tracks the S&P 500 index – but with a an added “buy-write” covered call strategic overlay to generate option income.
