A local wealth manager has noted the recent strengthening of the Australian dollar could negatively impact the results for some companies during the current reporting season.
“A number of companies with a high proportion of their sales offshore will have entered reporting season forecasting revenue on the basis of the Australian dollar sitting at US$0.65 to US$0.67. With the dollar now above US$0.70, this immediately translates to a 5 to 7 per cent downgrade,” ECP Asset Management investments partner Andrew Dale said.
To this end, Dale identified the sectors that are likely to experience the most significant adverse impact of this currency movement.
“Going into reporting season, the general consensus was that there would be around 8 to 10 per cent growth in earnings across the board. But if you take resources companies out of the equation, which have performed well recently and have been bolstering those expectations, then the focus is on tech, industrials, healthcare and consumer-focused companies,” he indicated.
“These companies tend to be very vulnerable to currency movements because many of them are earning money offshore and translating back into Australian dollars. So it is likely that we will see some weakness coming through.”
Volatility characterised the first week of reporting season, which he attributed to high price-to-earnings tech stocks and global market commentary around the validity of artificial intelligence (AI) in the technology sector.
“AI may not be totally transforming of every business, but it is certainly here to stay and will have a positive impact on productivity. If used correctly, AI will help to drive and grow earnings in the long term,” he predicted.
“But we’re still at the infancy stage with companies still focused on how to leverage AI into improving productivity and how to grow their overall earnings in their markets. That’s where the story is going to be.”
With the negative AI sentiment in mind, he singled out WiseTech and Xero as companies that will deliver strong results.
“Companies like WiseTech and Xero have incredibly strong customer bases and they are operating in complex markets; their solutions aren’t going to be replaced by AI. We believe there is a lot more room for growth for these companies and the focus this reporting season will be on their ability to price, as well as their pricing power,” he pointed out.
“Further weakness in the short term is possible, but their long-term growth story still holds.”