“The sharp rise in the US dollar may slice more than $100bn off dollar-denominated revenues at some of America’s largest multinationals this year, a sum larger than the sales of Nike, McDonald’s and Goldman Sachs combined, according to a Financial Times analysis.”
Readers of this blog may recall that in the KCS First Quarter 2015 commentary we wrote;
With regard to the strengthening U.S. dollar versus major currencies, particularly the Euro, we think that U.S. large cap, multi nationals will be particularly challenged as the cost of their exports ratchet up, and competitors import prices make sales domestically more competitive. Could the U.S. dollar reach parity with the Euro? We certainly believe that can happen, as Europe continues its own QE initiative to jump-start economic growth and inflation.
Well, the impact of a strengthening US $ is beginning to be quantified, and as we speculated, corporate earnings are being dinged. In an FT article from August 2nd, it is estimated that the impact on earnings of US multinationals could be significant in 2015.
As mentioned in the article, in the first half of the year, 10 of the largest American multinationals have had their sales reduced by a combined $31bn — including blue-chip companies like Apple, General Motors, IBM, Johnson & Johnson, Amazon and General Electric — and concerns have mounted that a move by the Federal Reserve to lift interest rates later this year will push the dollar higher.
Given our concerns earlier this year about the impact of a strong US $, we began to trim equity positions among large cap domestic holdings, favoring instead small to mid cap companies whose earnings would not be impacted. Furthermore, if the dollar continues to rise versus other currencies, we would suggest that cap weighted, passive portfolios (index funds) will also be stressed in this environment.
Is it the time for active management?