Daily Management Review

Why we should forget about shares of American exporters


08/14/2017


This year, shares of US companies that receive bulk of their profits outside the country have shown significantly better returns than those of organizations oriented to the domestic market.



On average, the shares of the largest US exporters from the S&P 500 - the top 10 of the companies showing the geographical breakdown of sales - this year increased by 21%. In this case, shares of the bottom 10% of the list - that is, companies that generate the majority of US revenue - grew by only 6.4%.

It seems that it's all about lowering the dollar rate. The value of the American currency reached its maximum at the end of December and has mostly fallen since then. The dollar index, calculated by ICE, fell to 92.8 on August 3, being at 103.3 in late December. A weak dollar is profitable for exporters for two reasons: of course, American goods become cheaper for a foreign consumer, but more importantly, the revenue in foreign currency, being converted into dollars, is higher. According to Goldman Sachs, in the first quarter of this year, the falling dollar increased the profits of companies from the S&P 500 by 14%. 

Investors seem to be betting that this effect will continue. Shares of companies from the S&P 500 with the largest percentage of foreign sales are traded at 31 more than their anticipated profit for 2017, while this figure is 24 in 10% of companies with a minimum share of exports.

Some differences may be related to the groups’ composition: there are many technology companies in the list of the best exporters, in particular, manufacturers of processors Nvidia, Micron and Intel. In addition, a number of foreign markets are growing faster than the US, which also affects the success of exporters.

However, even if we take into account these facts, it seems that investors prefer shares of companies that benefit from the weakening of the dollar. The PEG coefficient (the financial ratio that compares the price of the stock to the earnings per share and the company's projected profit) is 4 for the largest exporters of the S&P 500, and this figure is just below 3 for a few exporting companies.

Proceeding from this, it is reasonable to assume that investors are betting on the further decline of the dollar, which reached its lowest since 2014, despite the fact that a number of analysts forecast recovery of the US currency.

Jens Nordvig, chief currency strategist at Exante Data, said that the European Central Bank could reduce quantitative easing and start raising interest rates, which would mean weakening of the dollar, but for this reason, inflation in Europe is not strong enough.

At the same time, the US Federal Reserve is apparently set to abolish quantitative easing due to the growth in available jobs. Moreover, notes Nordvig, anyone who this year made a bet on supporting the currencies from the central banks was wrong - the increase in the interest rate in the US helped the dollar a little. In this case, the correction may have already begun - this week the dollar grew.

Perhaps the point is that the public, convinced of the Trump administration’s inability to fulfill its pre-election promises in the field of international trade, is changing its expectations. However, the dollar is 3% lower than before the election of Trump, and, perhaps, at some point, the expectations will be revised again. Then the shares that benefit from the decline in the dollar will suffer.

source: bloomberg.com






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