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A lower Australian dollar cannot come quickly enough for companies with offshore earnings and exporters in the manufacturing, education, mining and tourism sectors. With further falls likely, buying companies that win from a lower Australian dollar is a good bet in 2014.

Several broking firms this year have encouraged clients to buy companies with a high proportion of offshore earnings that will be worth more when translated into Australian dollars. However, multiple broking firms recommending the same idea should cause investors to pause.

The other question is valuation. I like the prospects for Macquarie Group, Computershare, James Hardie Industries and Twenty-First Century Fox Inc, but struggle to buy most of them at current valuations. Computershare looks marginally undervalued.

That does not mean the theme of buying stocks with offshore earning should be avoided. Rather, that investors should identify higher-quality stocks and watch and wait for better value this year.

Pressure on the sharemarket is building rapidly: a sluggish economy, a cooling of the resource investment boom, and growing evidence that other sectors are not picking up the slack, will lead to more profit downgrades. As I write, the S&P/ASX 200 index is almost 7 per cent off its 52-week high, buffeted by emerging-market volatility and soft global economic data.

I expect this pullback to extend towards a sharemarket correction (technically, a 10 per cent fall from the previous high) in the next few months, which in turn will create a buying opportunity in stocks with offshore earnings. We may get there in a hurry, judging by market action this week.

In turn, financial-market turmoil and a sluggish Australian economy will lead to another interest-rate cut in the second half of 2013 and further weakness in the Australian dollar. Forecasting currency movements is a mug’s game, but it is hard to find a catalyst to break the dollar’s downtrend this year, notwithstanding short-lived spikes in the Australian dollar, as seen this week.

Higher-than-expected inflation might cause the Reserve Bank to keep interest rates on hold for most of 2014 and raise them by 25 basis points in the third or fourth quarter. But a weakening labour market – and a moderation in inflation expectations – will force another rate cut, in my view.

Also, it makes sense to own companies less exposed to Australia’s slowing economy, with US companies, for example having potential for faster growth. Higher portfolio exposure to the US sharemarket – in anticipation of an improving US economy – was a key theme of this column last year.

Even so, there seems little need to buy beneficiaries of a lower Australian dollar just yet. Better value will emerge during the unfolding sharemarket correction, and more clues about the strength of earnings and profit guidance will surface during the February interim reporting season.

Macquarie Group should have a prime spot on portfolio watchlists. After stellar share-price gains over 12 months, the investment bank has fallen from a 52-week high of $56.20 to $53.34 – in line with recent market weakness – and would look a lot more interesting below $50. Morningstar’s fair value is $57.

Macquarie should benefit from a pick-up in mergers and acquisitions and IPOs, improving investment markets in the second half, and the lower Australian dollar. About half of last financial year’s revenues came from offshore and the figure is rising as Macquarie successfully expands overseas.

Computershare also warrants a spot on watchlists. The leading share registry has eased from a 52-week high of $11.66 to $10.81 after solid gains in the past 12 months.

Like Macquarie, Computershare will benefit from a pick-up in corporate activity and deal flow, which creates more work for share registries, and a sustained recovery in the US economy. Almost 80 per cent of its revenue is earned offshore.

Computershare has the hallmarks of an exceptional company: a highly scalable business, recurring revenue, high switching costs that make it hard for customer to leave, and good management.

It is also a lower-risk way for long-term portfolio investors, such as Self-Managed Superannuation Funds, to play the theme of improving offshore economies and a weakening Australian dollar.

Building materials company James Hardie has its attractions: the US housing recovery has a long way to run and it is ideally positioned to benefit, with 72 per cent of earnings made in that country. But the market is well aware of its earnings leverage; James Hardie has run too hard, too fast for now.

Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at February 6 2013.

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