When evaluating a business, it is important to understand what drivers will have an impact on the profits and profitability. In the case of most businesses, currency will be a factor to a varying degree. Exporters will benefit when a currency falls, importers will benefit when it rises. Those companies with offshore operations will see a translation effect on their earnings and hence their valuation will rise or fall on the movements of the currency.
So the currency will have an impact on share prices and markets, it is however important to not let it dominate your process. When we buy shares in a business, it is not for the benefits they might receive from a moving currency; it is for the assets of the company and their ability to grow their earnings regardless of what the currency might do. Hence, we watch the currency and the drivers behind it but ultimately we don’t let it dictate our investment decisions.
Headwind for exporters and tourism
Exporters will suffer, as potentially tourism will. The main listed exporters are the miners and whilst a higher dollar should theoretically be negative for them, we need to remember that one of the key drivers of the AUD is commodity prices. Elsewhere, given the manufacturing sector was decimated by a rising AUD from 2000 to 2012, a number of the remaining players tend to be high-quality global businesses that can withstand challenges. We may see share price volatility for these businesses but on an operational basis, we would expect limited impact.
Tailwind for distribution businesses and retailers
Importers will benefit from a higher dollar. The most obvious beneficiaries of a higher dollar in the past have been the retailers. However, with the imminent arrival of Amazon we would suggest that any current benefit would be short lived. One area that could see a positive impact is distribution businesses particularly in areas such as IT that have structural tailwinds. Whilst there is no direct benefit to these companies from a rising currency, we may see increased volumes as offshore products become more affordable for local businesses.
Information Technology is the fastest growing sector on the global stage. In Australia however it represents less than 2% of our market. As a result, products are sourced from offshore. A rising Australian dollar makes these products more affordable for Australian businesses and could lead to an increase in volumes.
Two small cap tech stocks to benefit
Two companies to benefit from this activity would be Data #3 and Dicker Data. Both companies have distribution businesses whilst Data #3 has an additional services division that leverages off its relationships and the products it distributes. Dicker Data has recently followed in Data #3 footsteps with the exciting announcement that it will partner with Japanese company Hitachi Data Systems. Both Data #3 and Dicker Data trade on reasonable multiples, pay good dividends, are currently experiencing strong earnings growth and operate in an industry with structural tailwinds. As a result, they are currently two of our core holdings.
Guy is the head of Australian Value Strategies at TAMIM Asset Management and is manager of the TAMIM Australian Equity All Cap Value IMA. Guy has over 13 years’ investment experience as an analyst and fund manager.