Depreciation of the Australian dollar a key factor to watch this earnings season

Matt Griffin

The Australia dollar is a key factor that markets have yet to price in and will need to be closely watched this earnings season, according to co-portfolio manager of the Australian Smaller Companies fund at Maple-Brown Abbott, Matt Griffin.

Over the last quarter the Australian dollar is down 9 per cent, around 6c, to the US dollar, which Mr Griffin says is not reflected in consensus numbers for a majority of stocks.

“Sell-side estimates always become a bit stale at the start of the year, as analysts haven’t updated their number for several weeks during the holiday season. As a result, consensus is still using 67-68 cents in a lot of their assumptions.

“For retailers and importers that purchase goods in foreign currency, the readjustment to a lower Australian dollar will take about 6 to 12 months to flow through to cost of goods sold, given currency hedging in place. These companies will need to put through a material price rise to offset the currency impact, but this will be particularly difficult in the current environment given the cost-of-living pressures. It will be something to watch this earning season.

“On the other hand, for companies with offshore operations, such as US tech companies like Pro Medicus (ASX:PME) and Life360 (ASX:360), we would expect to see earnings upgrades in AUD terms as they benefit from the strong US dollar.”

Mr Griffin says Australian gold miners are also likely to benefit from the currency moves.

“The Australian gold price is now over A$4000 per ounce, meaning there is plenty of margin for domestic miners. However even with the rise in gold prices, specific stock selection is essential,” says Mr Griffin.

The depreciation of the Australian dollar will also be a positive for potential mergers and acquisitions from offshore players.

“For a US private equity firm or corporate acquirer, the valuation of companies in Australia is now 10 per cent cheaper than it was last quarter, so we expect more M&A activity this year. A great example of this is the bidding war over Insignia Financial,” says Mr Griffin.

Apart from potential currency headwinds, Mr Griffin says he is relatively downbeat on the retail market.

“The feedback we have so far from retailers is that the top line is holding out. However, having a stable or slightly increased topline hasn’t offset margin factors, which has been driven by discounting over the past several months, coupled with wage and rent rises.

“Overall, we think the market is too optimistic on margins for many retailers this reporting season. We have seen Premier (ASX:PMV) and Myer (ASX:MYR) this month have big earnings downgrades, despite revenue holding up reasonably well. We are expecting some downside margin surprise from some retailers this earnings season, but again it will be down to those stock specific stories,” says Mr Griffin.

The smaller end of the financials sector is where Mr Griffin is optimistic.

“A number of the smaller financial companies have exposure to the US market, where the consumer is in good shape. Any easing of inflation and interest rate cuts should bolster consumer demand for credit, and lower funding costs.

“One of our key picks in this sector is ZIP (ASX:ZIP). With buy-now-pay-later segment still in its early stages in the US compared to Australia, there is potential for earnings upgrade over the course of the year. ZIP is already making good gains in terms of merchants in the US market, and we expect them to grow the number of active customers as well. This, coupled, with the general positive consumer financial health in the US, suggests positive tailwinds for ZIP in the year ahead.

“Judo Financial (ASX:JDO) is another key pick for us in the financials sector this earnings season. It is a challenger bank that is taking on the big four in the business banking segment, and has already hired some of the top business bankers from its competitors. It’s done a great job getting the right mix for loan book growth, credit risk and funding costs,” he says.

“We are expecting hits and misses by sectors this reporting season, but ultimately it will come down to those stock specific stories and how companies are mitigating potential headwinds heading into 2025.”