The Australian dollar (AUD) has rallied c7% against the US dollar since the start of 2016 on a combination of uncertainty about global growth and US Federal Reserve’s about-face on targeted interest rate rises amid lower growth and inflation, helping to support the currencies of commodity-exporting nations such as Australia. We believe the AUD is at the mercy of the USD and fluctuating commodity prices, with the market to remain volatile as investors look for clues on the market’s direction from US monetary policy. On a one-to-three-month view, we believe the USD is likely to remain soft and AUD supported on the carry trade and global currency wars. Over the medium term, we believe the USD should regain strength on the resumption of Fed rates normalisation process and likely further easing from the RBA and other major central banks later this year. So what does this mean for FX exposed healthcare stocks?
We see more downside risk over the near term (the ASX200 Healthcare index has underperformed the market by 1.8% over the past month), given an estimated 80% of the movement in the ASX200 healthcare index is negatively correlated to the AUD/USD cross, but note any specific impact will be company specific. For USD reporting names, Ansell, Resmed, and CSL, USD weakness has a positive revenue impact, but can be offset by local cost hedge or rest of the world COGS, while mark-to-market translation is negative for the trading price. For AUD reporting stocks, Sirtex, Cochlear, Ramsay, and Sonic Healthcare, USD weakness is a headwind across both transactions, with the impact only moderated where higher price FX hedges are held, as well as translation. While maintaining a cautious stance to protect against downside risk, we would also be opportunistic as the FX impacts wane and look to position in good quality names underpinned by strong fundamentals, including Healthscope, CSL, and Ramsay.