Published in AFR by Sarah Turner – AFR 20/1/20 (Original Source Link Here)
The inauguration of Joe Biden as president of the United States will only entrench US dollar weakness, and some investors are already pulling out of the Australian companies that depend on the US for a large portion of their earnings.
“If you’re printing money twice as fast as anyone else, you’re going to devalue your currency.” Katana Asset Management’s Romano Sala Tenna. Tony McDonough
Mr Biden has flagged a radically different policy agenda to predecessor Donald Trump, including a focus on renewable energy, measures to reverse the Trump administration’s deregulation focus, an infrastructure push and tax hikes to counter Trump administration cuts.
Underpinning the Biden adminstration’s policies will be another round of fiscal stimulus, of $US1.9 trillion ($2.45 trillion), to support the economy as it continues to battle the strain of COVID-19.
There are clear implications for the Australian sharemarket from a change of control in the White House, Romano Sala Tenna, portfolio manager at Katana Asset Management, said.
“On the positive side, record stimulus and control of the Senate means that we are going to see a very expansive, socialist, base platform so we will see the $US1.9 trillion come through and then more,” the fund manager said.
“On the negative side, corporate tax rates will increase and the policies – because they are so damaging to the US dollar – will mean that cross currency rates become an issue.
“Companies with US-domiciled earnings are going to be much more exposed because these policies are playing right into the hand of US dollar weakness.”
Weighting down
Mr Sala Tenna cut his position in gaming machine producer Aristocrat Leisure on concerns about US dollar pain. “We are literally selling out of Aristocrat Leisure this morning because of US earnings,” he said.
Blood products group CSL, packaging group Amcor, logistics provider Brambles, diagnostics group Sonic Healthcare and building materials company James Hardie are some of the companies that also have large operations in the US.
As such, domestic economy stocks are arguably a better opportunity, “and I think the way Biden is going, it’s accelerating that move,” the fund manager said. “If you’re printing money twice as fast as anyone else, you’re going to devalue your currency.”
The US dollar index, which measures the currency against a basket of seven other currencies, is down 12 per cent since March last year, at 90.49.
The US would probably welcome a weaker dollar, given that it would increase competitiveness.
“I don’t think the US is manipulating the currency. I think the weakness is a genuine byproduct of their policies,” Mr Sala Tenna said.
And even if the US was concerned about US dollar weakness, it’s inevitable, “because they have to print money to kickstart the economy,” the fund manager said. “I think that things will get worse in the US before they get better, in the next quarter at least.”
Against a backdrop of further depreciation of the US dollar, gold, precious metals and other commodities “should rally on the back of record stimulus”.
Bond tremors
The fund manager is watching the 10-year bond yield closely: US Treasury yields crossed over 1 per cent at the start of the year as investors considered the prospect of stimulus-fuelled inflation and better economic growth.
The risk is “if they do throw stimulus at the economy at the levels they are proposing, then they are going to lose control of the 10-year bond yield at some point,” Mr Sala Tenna said.
“That’s very bad for any long-duration assets, such as the technology sector.”
There is some indication of this already in light of how Treasuries have performed, although the sell-off could easily worsen, the fund manager said, while cutting his weighting to technology names.
On the other hand, financials will benefit from rising bond yields along with value and old-economy businesses, Mr Sala Tenna believes.
Hugh Dive, portfolio manager at Atlas Funds Management, acknowledged the other side of a weaker US dollar is a higher Australian dollar.
“The rising Australian dollar impacts the Australian dollar earnings of a lot of companies from miners to industrials,” he said. “A weakening US dollar means our exports are less competitive.”
But overall, “what I’m looking forward to is a market that’s a bit more normalised,” he said, recalling the four years of volatility during which investors reacted to every tweet from Mr Trump.
“It’s probably going to take a little bit more to move our market, which for equity managers is quite a positive thing.”