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Wednesday, March 25, 2015

Strong Dollar Winners and Losers

Although we have had a pause, the US dollar has strengthened over 20% against the Euro in the past 12 months

Who wins and who losses from the move ?

Losers: Large cap multinational coroporations

Worst hit from the strong US dollar are US multinational corporations. Their large sales overseas means large declines in the US dollar value of their earnings.

As the WSJ reports:

Analysts have sharply reduced earnings estimates; smaller, domestically focused firms gain allure

Analysts, citing the dollar’s strength as a key factor, are predicting that profits at S&P 500 firms for the first quarter will show their biggest annual decline since the third quarter of 2009.
As a result, investors are keeping a continued bias toward U.S.-based stocks that do less business abroad, such as shares of small companies that tend to be more domestically focused, and on companies outside the U.S. that stand to benefit from a weakening of their home currency as the dollar strengthens, particularly European manufacturers

The speed of the move means that these corporations have been caught by surprise not implementing the currency hedges they often put in place.
. It is the large cap multinationals that take the biggest hit, Many of these are in the S+P 500 others in both the S+P 500 and large cap indices such as the Russell 1000.

Winners are European multinationals. They benefit in two ways: their foreign earnings in dollars are worth more in Euros and their prices are they charge for therio goods and services can be more competitive in selling to foreign markets as their goods are priced in Euros/their costs are in Euros. After a long period of underperformance European stocks have outperformed US stocks as the Euro has weakened. Year to date Eurozone stocks (ETF ticker FEZ) have outperformed the S+P 500 by 7.7% vs 2% the hedged European ETF (ticker HEDJ) is up 19.6%.

Large Cap vs Small Cap US Stocks. Small cap companies tend to be more domestically oriented and thus less affected by the lower Euro. After underperforming  with a return of 5% (etf vtwo) for small cap vs 13.1% for large cap (IWB) in 2014, the trend has reversed year to date with small cap at 5.2% year to date and large cap 2.6%.

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