Daily : At The Moment News
7 January 2016
Global equity markets fell once again overnight as the oil price reached fresh lows, China growth concerns,
and political tension from North Korea weighed on investor confidence. We remain focused on bigger picture
and continue to have a positive medium term outlook, looking through the current noise in markets. Crude
oil has reached a fresh 11 year low towards $34 a barrel as oil supplies at a U.S. hub rose overnight, while
China unexpectedly weakened its currency (Yuan) which raised fresh concerns that the Chinese economy is
weakening and in need of support. This has seen a sharp correction in the Australian dollar down to
US$0.7060. In today’s daily we reiterate our views on the Aussie Dollar, and discuss Ardent Leisure (AAD.AX),
one of our key holdings set to benefit from a weaker currency, in our view.
Ailing Aussie Dollar
Australian Dollar – the Fall
The Aussie Dollar is continuing its downward trajectory after attempting to push higher to the 73 cent mark
versus the US dollar. Since the beginning of the year, the Aussie has fallen over 3% against the greenback
to 0.7060. The resurfacing of China growth fears and lower commodity prices are the major drivers of the
recent move.
Australian Dollar – Outlook
As correctly predicted by , we believed the Aussie Dollar would gravitate back towards the 70 cent
mark and it is likely to stay around these levels for some time in our view. Over the longer run, the interest
rate differential between Australian and the US will be the most important factor of the moves in the
currency. Australia currently has a 2% cash rate while the US has a rate of 0.5%. Long term currency moves
are generally a reflection of the difference in interest rates between countries. As these two rate equalise
over the coming years (with the US Federal Reserve gradually raising their interest rates), further pressure
is likely to be exerted on the AUD.
Beneficiaries of a Low AUD
A lower Aussie Dollar is a key thematic that resonates though the Australian portfolio. We hold a
number of Australian stocks that directly benefit from falls in the AUD
One such key investment theme is increased tourism and consumer entertainment spend as a result of a
weaker Aussie Dollar. Firstly we expect increases from international visitors as Australian and New Zealand
become relatively more attractive holiday destination compared with their global counterparts. Secondly,
a lower domestic currency deters Australians and New Zealand’s traveling overseas, with a higher
percentage electing to holiday locally. This should give local consumer facing stocks an uplift. One of these
stocks is Ardent Leisure (AAD.AX) which we see as a key beneficiary of a lower Australian directly through
its significant US business exposure, as well indirectly as a result of increased tourism to its theme parks in
Australia.
Chart of the Moment:
Shares in Ardent Leisure (AAD) have sold off significantly of late in the absence of any direct negative
news and we view the current sell-off as a buying opportunity. AAD shares now offer an attractive
dividend yield (5.8%), and trade on a price to earnings multiple of 16.0x for 2016. The next important date
for the company we will be watching closely is the 17th February 2016, when AAD is expected to release
its half year financial results.
Five Things Markets Will be Watching this Week
1) How global equity markets will trade in the first week of the year, and particularly whether they
can reverse recent losses.
2) Chinese manufacturing data has recovered somewhat of late, and further data will be released
early this week.
3) US employment data will be released later in the week, and the market will look for continued
strength to support further interest rate hikes by the US Fed.
4) The Oil price – whether the free-fall in the oil price will halt or reverse will be important for both
energy stocks and market sentiment more generally
5) Dairy prices will be released early in the week, with a recovery important for several agricultural
stocks held in our portfolio.