Strong Australian dollar could impact earnings this reporting season

The Australian dollar hit a three-year record high this week, moving above 70 US cents, which is likely to see several Australian companies downgraded this reporting season, according to Andrew Dale, partner, investments, at ECP Asset Management.

“A number of companies with a high proportion of their sales offshore will have entered reporting season forecasting revenue on the basis of the Australian dollar sitting at 65 to 67 US cents. With the dollar now above 70 US cents, this immediately translates to a 5 to 7 per cent downgrade.

“Going into reporting season, the general consensus was that there would be around 8 to 10 per cent growth in earnings across the board. But if you take resources companies out of the equation, which have performed well recently and have been bolstering those expectations, then the focus is on tech, industrials, healthcare and consumer focused companies. And these companies tend to be very vulnerable to currency movements because many of them are earning money offshore and translating back into Australian dollars. So it is likely that we will see some weakness coming through,” he says.

The first week of reporting season has already seen a high level of volatility in the market, further exacerbated by overseas markets which tend to drive sentiment in Australia. Dale says the volatility is unsurprising in light of the high price-to-earnings tech stocks and market commentary around the validity of AI in the technology sector, which has dominated markets globally.

“AI may not be totally transforming of every business, but it is certainly here to stay and will have a positive impact on productivity. If used correctly, AI will help to drive and grow earnings in the long term.

“But we’re still at the infancy stage with companies still focussed on how to leverage AI into improving productivity, and how to grow their overall earnings in their markets. That’s where the story is going to be,” said Dale.

Dale says Australian listed tech companies like WiseTech and Xero are expected to release reasonable results this season, despite a sell-off of these companies by those who think AI will reduce their total market share and opportunity.

“Companies like WiseTech and Xero have incredibly strong customer bases and they are operating in complex market; their solutions aren’t going to be replaced by AI. We believe there is a lot more room for growth for these companies, and the focus this reporting season will be on their ability to price, as well as their pricing power. Further weakness in the short term is possible, but their long-term growth story still holds.”

The healthcare sector is another area where Dale says investors should look for long term growth opportunities.

“The healthcare space has underperformed quite materially in recent months, but there are some great quality companies that still have good sales growth and earnings growth. For example ResMed and Cochlear both have very strong revenue growth, and the financials have come back into play,” he says.

In the resources sector, Dale says that those who haven’t yet invested in these companies have likely missed most of the upside.

“There is a lot of appetite amongst investors to get exposure to hard assets like lithium, iron ore and gold. The outlook for these resources remains strong, however for investors who are currently underweight in resources and are looking at investing to gain, the ship has probably already sailed, as the price for these resources is on the higher end,” he says.

Faced with another volatile reporting period, Dale says this could be the norm going forward.

“It has become somewhat of a common trend that reporting season is a period of high volatility. This shouldn’t be a surprise to investors, and should be expected going forward.

“Long-term investors should look beyond the short-term market noise and understand the fundamentals and competitive advantages of the companies they are invested in, and look for quality companies that can evolve and grow with the market,” says Dale.