The fall of the $A is occurring at the same time as much greater volatility is occurring in equity and commodity markets. The AFR reports Joshua Stega, director of financial advice business JAS Wealth says the $A has been seen as a safe haven currency, but the dynamic is changing:
“We are now in a position where the US economy is picking up and the prospects for interest rate rises in that market mean demand for the US dollar will increase as money flows back to the US.” Given this shift, Stega says investors should look to increase their exposure to assets that generate international income, as overseas earnings become more valuable in Australian dollar terms.
“It is important to realise that international investors will be doing the complete opposite, selling investments that generate Australian domestic income.” This is one reason why there has been a sell-down of local banks and miners."
For DIY super investors, it may be a positive. They are not affected by the Australian dollar's value in relation to overseas currencies; they have their holdings in $A. A sell off by overseas investors may make local shares better value. What seems to be bad news can often be good news for investment timing.Some analysts believe there will be pressure on the big companies:
"Stega says investors need to be aware international investors are likely decrease their holdings in the big four banks and industrials such as Wesfarmers and Woolworths, as well as telcos such as Telstra. These businesses generate the bulk of their profits in Australia, in Australian dollars, so share prices are likely to fall in an environment in which the domestic currency continues to decline."
The lower $A positively affects domestic companies that export, because the value of their earnings in the local currency will be higher. The major miners operate in $US terms and have a global investor base, so the effect is neutral. Importers will do worse.
The AFR continues:
"Peter Horsfield, founder of financial advice business Smart Advice agrees that as the US economy recovers and global investors move their money to less volatile economies, the global reallocation of investments and currencies is creating both headwinds and gains for Australian share market investors.
He suggests winners from the recent downward movement of the currency will be travel and tourism business, as well as Australian companies looking to merge with firms domiciled in other jurisdictions.
However, Horsfield says sectors set to face higher operational costs as a result of the lower dollar will include domestic banks, local property firms and consumer retailers selling imported goods such as electronic devices and vehicles."
The upshot is that there are negative signs for the Australian financial markets. In thjeory, this can be a good time to invest, but of course there are always risk. JP Morgan comments, business confidence is weakening:
"Australia's NAB business survey for September continued the fade in sentiment and conditions that started in August.
The net balance on the confidence (+5) and conditions (+1) indices both fell two points, while profitability was down (+3 to 0), and employment intentions slumped back to clearly negative territory, from -1 down to - 4. Firms’ assessment of their own profitability has now unwound nearly all of its post-Budget recovery, while the employment index is back at December 2013 levels. Trading conditions, at least, were stable at +6, but similarly have given up the gains from when the consumer initially appeared to be shaking off the Budget blues moving into 2Q."