Is the meme of buying firms with lots of exposure to emerging markets now officially dead? For Goldman Sachs that seems to be the case.
A growing number of analysts are saying that the big move up in the dollar over the last couple of quarters is just the beginning of a secular trend that still has a long way to go. Goldman Sachs Portfolio Strategy Research’s US Weekly Kickstart for March 13th highlights that given their analysts project the euro is likely to decline by as much as 25% against the dollar over the next couple of years, investors would be wise to focus on stocks who derive most of their revenues in the U.S.
U.S. Dollar: Buy stocks with high domestic sales
GS analyst David J. Kostin and colleagues note that both historical records and their proprietary earnings model suggest that the direct impacts of a stronger dollar on index-level equity performance will be small, but also point out that “indirect impacts could be larger should USD appreciation weigh more heavily on economic growth, particularly in the US”
The report argues that firms with high U.S. sales offer better growth and value and fundamentals than companies with high sales exposure to Western Europe. The analysts highlight that the “50 stocks in our domestic revenue basket have lower beta (1.0 vs. 1.1), faster sales growth (5% vs. 3%), faster EPS growth (9% and 7%), and the same dividend yield (1.6%) but trade at a lower forward P/E multiple (18.7x vs. 19.1x) than the 50 stocks in our high Europe sales portfolio.”
Goldman Sachs sector recommendations
Kostin et al also note that their recommended portfolio currently overweight the Information Technology, Energy and Telecom Services sectors. Goldman Sachs is currently underweight the Financials, Consumer Staples and Industrials sectors.
Foreign exchange historically has minimal impact on S&P 500 returns
The Goldman Sachs report highlights that the “trade-weighted USD” has seen nine strengthening and weakening cycles since their record-keeping began. Of note, “the median annualized S&P 500 return was nearly identical during both cycle phases, posting similar returns regardless of whether the dollar was rising or falling.” They also point out that the one-year daily correlation of the USD and S&P 500 has averaged 0 over almost 40 years (since 1976).