There are a lot of scary global economic, financial market, and geopolitical news headlines crossing the wires lately. Greece is in a banking crisis, which threatens to bleed into the rest of Europe. China’s economy is slowing suddenly and its stock market is crashing. Political turmoil and red-hot inflation is plaguing the big Latin American economies. Low oil prices are crushing Canada’s massive oil sector. And the list goes on.
In many ways, the US is looking like the best economy to be exposed to if you’re an investor.
But keep in mind, while the S&P 500 consists of US-based companies, a lot of those businesses conducts tons of business abroad.
“Foreign sales accounted for 33% of aggregate revenue for the S&P 500 in 2014,” Goldman Sachs’ Ben Snider writes. “The median stock reported 29% of sales outside the US. Both of these figures were the same in 2013. Companies reported that 12% of revenues came from EMEA (Europe, Middle East, and Africa), with 7% directly attributable to Europe. Approximately 8% of revenues stemmed from the Asia Pacific region with 1% disclosed as coming specifically from Japan and 2% from China. Roughly 6% of revenues were foreign but unclassifiable.”
In addition to weak sales due to deteriorating foreign demand, these multinational companies have to worry about the strengthening US currency, which shrinks the value of foreign profits when they get converted to dollars.
“Domestic-facing US stocks have outperformed their most internationally- exposed peers by 16 pp in the last 12 months (+15% vs. -1%) as the trade- weighted USD strengthened by 15%, Snider noted. “We expect this trend to continue, with EUR/USD reaching 0.95 and USD/JPY reaching 130 within 12 months. EM- facing stocks have suffered as growth and inflation concerns mounted. Firms with large Europe exposure lagged as the EUR weakened but recovered as ECB easing inspired investor confidence in the GDP growth outlook.”
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