The U.S. dollar’s decline can be worrisome. But for investors, a weak dollar can be your friend.
It’s easy to worry that the cost of imported goods will increase and the economy could slow when the dollar starts sliding. Another side effect is that it makes goods and services produced at home cheaper for foreign buyers. If you look at the most valuable companies in the market these days, they’re generating more sales overseas than you may realize.
When you think about the dollar this way, investing opportunities can be found.
How’d we get here?
The U.S. dollar is down 9% over the past year versus six major currencies and nearly 12% lower from its peak last March.
There are several reasons why the dollar has declined during the COVID-19 pandemic. For starters, the Federal Reserve has pledged to keep short-term interest rates at or near zero to help support the job market. On Wednesday, minutes of the latest Fed meeting confirmed this policy could remain in place for quite some time. That stance can entice investors to look for better returns overseas, putting pressure on the dollar as it is converted into other currencies to buy securities abroad.
On the fiscal side of things, President Biden has recently proposed a fifth round of economic stimulus with a $1.9 trillion price tag. More stimulus means greater government deficits. The dollar isn’t a fan of widening deficits.
Either way you look at it — low investment returns on bonds (especially figuring in inflation) or printing money 24/7/365 — means the dollar is likely to remain at depressed levels for at least the next couple of quarters.
Weak dollar, earnings tailwind?
Now that we understand why the dollar has declined and why it could remain depressed, how could that benefit investors?
When a U.S.-based company does business overseas, it takes on extra risk, including any change in foreign exchange (forex) rates. In a period where the dollar is heading lower against other global currencies, as has been the case for the past few quarters, the forex “risk” could become a benefit. It can result in a profit windfall when those sales are translated back home each quarter.
These currency gains can add up quickly. In 2018, S&P 500 companies generated about 43% of their revenue from outside the U.S., according to S&P Dow Jones Indices. That works out to $4.87 trillion for the most recent year this data was reported.
Sectors and Companies That Could Benefit
Based on S&P’s calculations, more than half of the annual revenue in the S&P 500’s technology, materials and energy sectors were generated overseas. These are cyclical groups, and they’re poised to benefit from a reopening of the global economy over the next six to nine months.
At the other end of the spectrum, the real estate and utility sectors have virtually no currency exposure. These businesses tend to be more regionally focused, and S&P primarily selects U.S.-based firms for the index.
While some sectors tend to realize more foreign sales than others, the actual exposure varies from one firm to the next, so it can be beneficial to dig deeper to find the real beneficiaries of a weak dollar.
Below are some examples of companies that generated at least 45% of their revenue from outside of the U.S last year and have a market capitalization north of $100 billion. There are some of the usual suspects, but a few names may come as a surprise.
The Overseas Sales Boost
Largest S&P 500 Companies With at Least 45% Foreign Revenue
|Company||Market Cap ($ Billions)||Price-to-Earnings Ratio||Trailing 12 Months Revenue ($ Billions)||% Revenue From Outside the U.S.|
|Johnson & Johnson||$435||25||$83||49%|
Source: Ally Invest, Thomson Reuters, Bloomberg
This can be a good starting point for finding investment ideas in this environment (though they are not meant to be recommendations). As usual, we suggest you do your homework on the strategy of the company, its financial status and its valuation before making any investment decision.
You can find the foreign exposure and profit/loss from operating overseas of virtually any U.S.-based company within their quarterly (10-Q) and annual (10-K) SEC filings.
The Bottom Line
The dollar has weakened over the past year and we believe it is likely to remain depressed near-term, even as the economy continues to re-emerge from COVID-19 restrictions in the first half of 2021.
Notably, a few cyclical sectors and some of the largest companies in the world could have the wind at their backs for the next couple of quarterly earnings reports.
As we’ve said for some time now, our view is that the margin expansion story has not been getting enough attention from investors. A weaker dollar adds another supporting element to our margin expectation. Ultimately, we see it as a potential cherry on top of the 20%-plus annual earnings recovery that is the consensus estimate for 2021. Based on this expected profit growth, it’s easier for us to see a path where U.S. stocks grow into what is considered a high valuation by the second half of the year.
Callie Cox, Senior Investment Strategist, contributed to this article.
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo-advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She is a contributor at CNBC, and frequently shares her insights with various publications including the Wall Street Journal, Barron’s, MarketWatch, BusinessInsider, etc. She also serves on the board of Better Investing, a non-profit organization focused on investment education.
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The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.