A few months ago, we discussed what a rising dollar means for investors’ stock portfolios. In that piece, we pointed out that the S&P 500 Index has traded inversely to the currency moves over recent years, and it has become increasingly negatively negatively correlated. One reason, we believe, is that a growing share of revenue and profits for U.S. corporations comes from overseas—and that share seems likely to increase with the globalization of the economy. Although currencies are not the sole driver of equity returns, we think that they are important to monitor, particularly now, given recent central bank actions.
Some multinationals are still feeling the effects of the U.S. dollar strength, and the moves may persist. The most recent warnings are below:
The Procter & Gamble Company:1
“The October?December 2014 quarter was a challenging one with unprecedented currency devaluations,” said A.G. Lafley, P&G’s chairman, president and CEO. “Virtually every currency in the world devalued versus the U.S. dollar, with the Russian ruble leading the way.” He also said, “The outlook for the year will remain challenging. Foreign exchange (FX) will reduce fiscal 2015 sales by 5% and net earnings by 12%, or at least $1.4 billion after tax.”2
Amy Hood, Microsoft’s CFO, estimated that, “In total, we expect that FX will negatively impact revenue growth by approximately 4 percentage points in Q3.” She also said, “Our guidance is based on our current view of FX rates. Should the U.S. dollar strengthen beyond those assumptions, as it did this quarter, we would see additional negative impact to earnings, revenue, our balance sheet and our contracted-but-not-billed balance.”4
The Impact on Performance
While it can be difficult to quantify the exact revenue and profit impact across the globe from currency moves, we wanted to see if any performance trends might be visible over the past year. The median performance of domestic large-cap dividend payers, grouped by U.S. revenue percentage, shows that the U.S. dollar hurt the performance of global multinational firms trading in the United States over the past year.
Median Performance by Revenue Ranges
• High U.S. Revenue Performed Better: Companies with higher domestic revenues or lower international revenues do not see a revenue hit from a stronger U.S. dollar. If these companies import goods from abroad, their costs are actually reduced as the U.S. dollar gains strength. Financials, which includes real estate, and Utilities tend to have the highest percentages of domestic revenue; therefore they are not as negatively impacted by a strengthening dollar. These two sectors have also benefited from the decline in U.S. interest rates over the past year and saw very strong performance over the last year, significantly more than the global-export-oriented firms.
• Low U.S. Revenue Performed Worse: Companies with lower domestic revenues or higher international revenues are typically affected more by currency movements because they have to adjust their earnings based on these movements. This group is primarily made up of multinational companies in the Information Technology, Health Care and Consumer sectors. Firms in these sectors, like Microsoft and Proctor & Gamble, highlighted above, have recently reported negative currency impacts and warned about future impacts if the dollar continues to strengthen.
Who Benefits from a Strengthening Dollar?
• International Equities: Foreign multinational companies have the potential to benefit from a strengthening dollar because their products become less expensive to U.S. consumers, which could increase sales. These companies also benefit as their foreign sales are translated back to their home currency through a more favorable exchange rate, resulting in higher earnings. We think that this is why developed international equities have historically performed better in periods when their currencies were weakening than in periods when they were strengthening.5 Even though a stronger U.S. dollar and weaker euro or yen might improve the profits of European or Japanese companies, the dollar strength can drag down the total returns of U.S. investors who do not hedge their international equity exposure.
In a future blog post, we will examine the performance differential in exporters across different developed regions.
1The Procter & Gamble Company was a 1.93% weight in the WisdomTree LargeCap Dividend Index as of 1/30/15.
2Source: The Procter & Gamble Company, Q2 2015 fiscal year earnings press release, 1/27/15.
3Microsoft Corporation was a 2.59% weight in the WisdomTree LargeCap Dividend Index as of 1/30/15.
4Source: Microsoft, Q2 2015 fiscal year earnings conference call, 1/26/15.
5Sources: WisdomTree, Bloomberg, 12/31/69?12/31/14.