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One would have to be living under a rock to not be aware of the recent strong Australian dollar. Of course, for many, this can be seen as a positive for the Australian consumer, especially leading into Christmas.
We’re seeing import prices cheaper than ever as retailers get a little more bang for their buck when it comes to purchasing goods from overseas. That new plasma television or the Italian branded Cappuccino is more than likely going to be cheaper than ever! But it’s not all good news riding on the back of a strong Australian dollar. Certain industries are suffering and it may not be such a merry Christmas for all.
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When choosing stocks to invest, it is imperative one looks at driving factors determining profitability within that industry. For net exporters, a high Australian dollar can be hugely detrimental to the bottom line. Hedging against currency fluctuation can help to some extent, although this also introduces an element of speculation. A little fundamental analysis goes a long way, and as ValueGain users will be aware, a thorough company analysis can be done in just minutes, saving investors the time of searching the internet for often outdated results.
Just recently I was speaking with an acquaintance in the tourism industry. Many people may not be aware, but the tourism industry is considered one of Australia’s major exports. As a reader, you may be questioning why tourism would be considered an export? Consider all of those foreign dollars entering Australia, to purchase the ‘tourist experience’ created by us. It is a foreign inflow of cash into the Australian economy. Now consider that for every dollar a tourist wants to bring to Australia, they pay a significant premium for that experience due to the strength of the Australian dollar against most foreign currencies. The loss of tourism into Australia doesn’t just affect hotels and resorts. Business owners Australia-wide suffer as the flow-on effect of dollars spent doesn’t reach their respective industries. This is just one example of the effects of a high Australian dollar on the export industry. An exception to this rule is the mining industry. Most commodities are priced in US dollars, therefore actually becoming cheaper for most countries to purchase as the US dollar begins to lose the stronghold on its place as the world’s dominant currency. US dollars are cheaper than they have been in a long time, and this, in turn makes commodities more affordable.
Analysing the fundamentals of the global economy and currency fluctuations can be a confusing topic. Retail investors aren’t expected to have a detailed understanding of the effects of macro-economic influences. However, if we can break these issues down to their simplest form and determine which sectors and stocks within those sectors will outperform under current conditions, you are sure to start 2011 in a positive fashion!
For the long-term investor, stock selection is imperative. The right decision today, is what will make the difference in returns for years to come. When you choose the next addition to your long-term portfolio, take a step back and consider the effects of currency performance on your portfolio.
Stay ahead of the game,
Lachlan McPherson
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