Australian dollar on the downward track
The fall in the $A is not surprising over the previous six months however the speed of the correction was somewhat surprising, a leading fund manager says.
Pengana Capital emerging companies fund manager Steve Black says the $A fell almost 8 per cent, triggered by an RBA rate cut, and a stronger $US due to the first hint from the Federal Reserve that QE may taper soon.
This fall in the $A sparked international investors to dump Australian shares which had been seen as “safe” in recent times due to the relatively high dividend yields.
‘The domestic economy appears to have faltered in recent months, with retailers such as David Jones, Fantastic Furniture, Target and Myer reporting soft sales,’ says Black.
‘Consumer sentiment and business confidence surveys support this, suggesting a postponement of activity pending the outcome of the election in September. We have sold shares which are exposed to this weakness (eg Seek), and will revisit after results season.
‘The rising $A is another reason to avoid discretionary retailers, due to the rising cost of importing products from China in $US.’
Australian shares fell 4.5 per cent during May, driven primarily by a sharp correction in banks, property trusts and Telstra.
While industrial shares fell, resources stocks rose 2.5 per cent in a volatile month.
Small-cap stocks also fell sharply, although resources stocks were down 5.4 per cent despite the strength in larger mining shares.
Mining services stocks were hit by a number of profit downgrades, as the downturn we had feared kicks in, says Black.
‘This vindicates our move to dramatically reduce our weight throughout 2012, with many stocks in the sector down 20-40 per cent during May.
‘We had also taken profits in some of our larger holdings such as Amcom, and REA Group recently on valuation grounds, which protected us from some of the pain in May as these more expensive stocks fell harder than the overall market.
‘Our portfolio is reasonably well-positioned should the $A fall further, as we are not heavily exposed to discretionary retailers, and our holding in Resmed benefits from the translation of its international earnings back into $A at an improved rate.
‘We maintain a skew to stocks not heavily tied to the economy. The overall picture remains highly fertile for stockpickers, with recent volatility highlighting opportunities for both profit taking and selective buying where valuations have allowed.’