Currency is one consideration among many factors, including the quality of the management, industry position and earnings per share, which we assess when evaluating a company as an investment proposition. In this wire, we look at some areas to avoid, and one stock in particular that offers good exposure, should the Australian dollar keep rising.
Areas of the market to avoid
The strengthening Australian dollar has created a headwind for companies with earnings exposed to the softening US dollar. Companies in this category include Brambles (ASX: BXB), Aristocrat Leisure (ASX: ALL), Ansell (ASX: ANN) and James Hardie Industries (ASX: JHX). Given the Greenback’s strength up until recently, companies leveraged to the US currency had experienced strong share price gains over the last financial year. Over the period, the US dollar trade provided investors with positive performance.
One good risk-adjusted exposure to a rising AUD
With most of their inventory imported from overseas, retailers, particularly apparel retailers, are among the beneficiaries of a strengthening Aussie dollar. While in most cases these businesses hedge against currency fluctuations, the share market will factor in future upsides of changes in the currency rate.
With iconic apparel brands including Portmans, Just Jeans and successful pajama label Peter Alexander, retailer Premier Investments (ASX: PMV) is an obvious beneficiary of the rising Australian dollar. A stronger dollar could provide a tailwind for the company and potentially lead to an expansion of its margins over the next two to three years.
With a management team consisting of some of the best retailers in the country, Premier also offers exposure to Smiggle, one of the fastest growing retail concepts in Australia and globally. In the first half of FY2017, worldwide Smiggle store sales were up 26.4% and Premier has a multi-year, store roll-out planned. The company has the ability to further expand its geographic footprint and could conceivably announce plans to enter new markets over the coming period.
Chris is the Chief Investment Officer of Wilson Asset Management, having joined the company in 2006. He is also the Portfolio Manager responsible for WAM Capital (ASX:WAM), WAM Research (ASX:WAX), WAM Active (ASX:WAA) and WAM MicroCap (ASX:WMI).