The Australian Dollar is making a comeback and these stocks are set to benefit: Citi
The Australian dollar hit a four-month high against the US Dollar earlier this week as growing expectations that the US Federal Reserve is done with rate hikes, further economic support from China and firm iron ore prices pushed the local currency higher.
The market is currently expecting a total of five 25 basis point cuts from the Fed in 2024, with the first cut to take place by March 2024. Regardless of whether that'll happen or not – It's placing upward pressure on the Aussie and Citi analysts expect this momentum to continue into 2024-25.
"With our Global Chief Economist’s view that a US recession is necessary to bring inflation down and the economy back into balance, the lower growth forecast is expected to see a weakness in the US dollar," Citi analysts said in a note on Wednesday.
"AUDUSD is expected to stay near current levels before strengthening and starting to return to its long-term forecast in 2025. Citi’s current forecast is for AUDUSD to reach 0.76 in Q4 2025."
Given the Australian dollar is forecast to strengthen, Citi analysts have identified companies that have historically outperformed under such conditions.
Sector Winners and Losers
"We find that stocks with the most reliable betas to AUDUSD tend to be cyclicals (positive) or defensives (negative)," the analyst said.
The below table shows the sectors with positive betas and T-stats measures. The sectors are ranked from best to worst in terms of projected performance.
- Beta: Measure of a stock's volatility relative to the market (or in this case, relative to the Australian dollar). A beta of one or more suggests the stock is aggressive and its price movements are more volatile than the Aussie.
- T-Stat: A high T-stat suggests that the movements between the Aussie and cyclical sectors are unlikely to be due to chance. While a low T-Stat suggests that the difference could be attributed to random variations or other factors.
Miners to Outperform
Cyclical sectors and companies have historically outperformed in a rising Aussie environment, according to Citi.
The below large-cap stock screen is based on a 10-year monthly backtest. Fortescue (ASX: FMG) is a clear standout given its leverage to iron ore.
It is worth noting that a) "not all of them are intuitive from a fundamental perspective," and b) some of the correlation comes from the fact that cyclical stocks and a rising Aussie are both caused by improving economic conditions as opposed to stock-specific fundamentals.
Defensives to Underperform
The below screen looks are stocks that have historically underperformed in a rising Australian dollar environment. This is because defensive outperformance and a falling Aussie typically coincide with periods of economic uncertainty, according to Citi.
This article was originally published on Market Index.
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