In the US at present, many home owners who chose adjustable rate mortgages a few years ago (when they could have locked in fixed 30-year mortgages at a couple of percent) have seen their repayments skyrocket, with current rates at around 6%. While employment figures are low and incomes are being earned, homeowners are maintaining a grip—albeit with white knuckles—on their household finances.
But this puts immense pressure on US Congress and the Federal Reserve to maintain low interest rates in order to avert a nationwide-housing disaster. And if currency traders don’t see growth figures and interest rates rising in the US, they’ll sell the dollar against a more attractive currency.
Prima facie, many Australians think this is wonderful, i.e., ‘Wooohooo! Our currency is going up! Cheap holidays! Cheaper imports!’ However, there is a dark side to a strong currency, and if the Aussie dollar runs too hard, there will be segments of corporate Australia that will not have anticipated it. Just imagine Australian wine producers trying to export their products at twice the price as they were a few years ago.
Stock picking at parity
The Rivkin Report recommends companies with and without material exposure to fluctuating currency rates. I have given all of my analysts a mandate to examine currency risk prior to bringing any new recommendations to my desk in the current environment. The Aussie dollar has run from around 79c to 92c versus the US dollar so far this year, and this presents a problem for certain stocks.
During our company visits of late, we have made it a top priority to grill directors over past, current and future hedging strategies.
I believe the exchange rate, the polarisation between resource and non-resource companies and interest rate policy in Australia are the primary macro focuses that any investor should be concentrating on when picking stocks on the Aussie market at the moment.
Good investing,
Nigel Littlewood
