Markets

The Australian Dollar is making a comeback and these stocks are set to benefit: Citi

Wed 06 Dec 23, 3:41pm (AEDT)
Australian currency laid out on a surface with a stack of coins used as a paperweight
Source: iStock

Key Points

  • The Australian dollar is expected to strengthen in 2024-25, driven by expectations of rate cuts from the US Federal Reserve and further economic support from China
  • Cyclical sectors and companies have historically outperformed in a rising AUDUSD environment
  • Citi analysts recommend buying stocks in materials, energy, and financials sectors, and selling stocks in industrials and utilities sectors

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."

Australian US dollar
Australia Dollar / US Dollar year-to-date chart (Source: TradingView)

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.

Sector

Cyclical or Defensive

Avg Beta

Avg T-Stat

Materials

Cyclical

0.6

1.2

Energy

Cyclical

0.5

0.8

Financials

Cyclical

0.1

0.5

Industrials

Cyclical

0.2

0.1

Communications

Defensive

0.1

0.1

Discretionary

Cyclical

0.1

0.1

Technology

Cyclical

0.2

-0.1

Utilities

Defensive

-0.1

-0.8

Real Estate

Defensive

-0.1

-1.0

Staples

Defensive

-0.4

-1.4

Health Care

Defensive

-0.3

-1.5

Source: Citi Research

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. However, 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.

Ticker

Company

Sector

Citi Rating

Beta

T-Stat

FMG

Fortescue

Materials

Sell

1.4

4.1

BHP

BHP

Materials

Neutral

0.5

2.5

RIO

Rio Tinto

Materials

Buy

0.5

2.4

MIN

Mineral Resources

Materials

Buy

0.8

2.2

CBA

Commonwealth Bank

Financials

Sell

0.2

2

STO

Santos

Energy

Buy

0.5

1.8

WBC

Westpac

Financials

Neutral

0.2

1.7

SEK

Seek

Communications

No Rating

0.3

1.7

BSL

Bluescope Steel

Materials

Buy

0.5

1.7

Source: Citi Research

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.

Ticker

Company

Sector

Citi Rating

Beta

T-Stat

BXB

Brambles

Industrials

Sell

-0.6

-3.9

CSL

CSL

Health Care

Buy

-0.5

-3.5

APA

APA

Utilities

No Rating

-0.5

-3.3

TCL

Transurban

Industrials

Buy

-0.3

-2.8

TLS

Telstra

Communications

No Rating

-0.4

-2.8

ASX

ASX

Financials

Neutral

-0.4

-2.8

WOW

Woolworths

Staples

Buy

-0.4

-2.6

SHL

Sonic Healthcare

Health Care

Buy

-0.4

-2.6

JHX

James Hardie Industries

Materials

Buy

-0.6

-2.5

COH

Cochlear

Health Care

Neutral

-0.4

-2.4

ALL

Aristocrat Leisure

Discretionary

Buy

-0.4

-1.9

CPU

Computershare

Industrials

Buy

-0.3

-1.7

Source: Citi Research

 

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Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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