Dollar Down! What Yield Stocks?

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By Peter Switzer, Switzer Super Report

With the Reserve Bank Governor Glenn Stevens playing the soothsayer in The Weekend Australian warning that our dollar could “slump on US rate rise”, the question is, is your portfolio set for such an occurrence?

Of course, I should add, accepting a tip on the dollar is like believing tips from jockeys, who historically are hopeless judges. Our dollar is a real tricky conveyance as it regularly has a 13-cent range on an annual basis! (That fact surprised me when a prominent economist pointed it out to me recently.)

But let’s take Glenn’s tip on the basis he knows better than jockeys and ask when might it happen? My guess is that it COULD happen before October and that’s when QE3 is expected to end. So, the dollar could dive ahead of that event, as forex traders tend to anticipate the future.

(If it happens later, then you might be set a little early but better early than never. Is that a new saying?)

The big picture

Currently the Fed is cutting back its QE3 bond buying by $US15 billion a month and so the big watch will be on US economic data. If it keeps coming in better than expected, then October will be seen as a shoe in for the end of QE3.

Some experts argue that after QE1 and QE2 ended the market fell over 15%, so the end of QE3 could follow suit, but I recall the US economy was crap then, so this time it could be different.

Different? I’ve seen and heard that before and it seldom is but I would argue a sell-off could easily happen in, or before, October and there will be a hell of a lot more dip-buyers than after QE1 and QE2. And I will be one of them, as I was after QE1 and QE2 ended, as long-time readers and clients might recall.

So the Oz dollar would dive on a biggish sell-off on Wall Street. But when the strength of the US economy begins to outweigh the fear of the end of QE3 and the beginning of higher interest rates, I don’t think this time there would be a rebound for the Aussie currency because the greenback will be on the rise.

What will be the trigger for the stock market and dollar dive? Try very good economic data plus better than expected earnings from US companies. If this double shows up, then Janet Yellen will be forced to juggle the worries of inflation, when to raise interest rates, the negative impact on stock prices and its effect on confidence.

Yellen would love to pull off the perfect play, which is a combination of economic growth, more jobs, a rising stock market and reasonable inflation. But she won’t pull the trigger on rates too early and ruin the confidence the Fed has built, unless the economy and earnings tell her she has to.

Stocks to play

So, the question for you is, is your portfolio set to benefit from a lower dollar?

The big miners BHP Billiton ((BHP)) and Rio Tinto ((RIO)) will do well, as should the two energy outfits — Woodside Petroleum ((WPL)), which is not a bad yield play nowadays, and Santos ((STO)).

Woodside, with grossing up, has dividends over 6% and BHP and Rio are around 5%, which makes them worth considering as dividend stocks. If the dollar drives up their share price, there could be a win-win outcome

FN Arena’s Rudi Filapek-Vandyck says Origin Energy ((ORG)) is the best-placed gas miner and he draws his info from his surveying of analysts.

Away from the dirty stuff and Flight Centre ((FLT)) is a company to benefit from a low dollar and my contacts in the travel industry always use Flight Centre as the benchmark for the sector.

If you really want to punt, QBE Insurance ((QBE)) will benefit from a lower dollar and a stronger US economy — that’s when people have money for insurance — but Paul Rickard and I think insurance companies are risky plays, so please yourself on this one.

Going smaller, I noted a company I put you on to last year, Ardent Leisure ((AAD)), which has done well, is a strong recommendation from a number of sources I respect. As it earns a lot of its income in the US and draws foreign tourists with its local attractions, the lower dollar should be good for the company.

And here is one worth thinking about, which has been a beauty for my SMSF — the SPDR S&P/ASX 200 (STW) exchange traded fund. If you accept that a lower dollar will be the catalyst to push up our stock market from its current level of around 5486 to say 6300, which is the adjusted level many experts talk about because of the capital raisings post-GFC, then there could be a 15% gain, plus dividends, by simply playing the index!

(Our all-time high was around 6700 but because of capital raisings it has been peeled back to 6300 and the relevance for me is that I believe we will pass our old all-time high before we see another market crash. This doesn’t ALWAYS happen but it has a good record.)

Over the next few weeks, I’m going to pursue companies poised to do well when the dollar falls and I want to find good dividend payers in this group as well, such as Ardent Leisure.

And over that time, keep monitoring the big Es — earnings and economic data especially from the US.
 

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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