Europe’s economy returned to growth in the second quarter, consumers have shown signs of improvement, and the manufacturing surveys are pointing toward expansion. This stabilization of the European economy is encouraging and a step toward alleviating a major concern for the global economy, but the strength of the euro appears to be hampering profits for some of the large-cap exporters.
The luxury goods market is one example that is front and center of this trend. Bain analyst Claudia D’Arpizio described the strong euro as “totally negative for a large number of companies in the sector as their consolidated balance sheet is in euro.”1
This is the reverse of the Japanese trend, where a weak yen has boosted profits for large exporters. When European luxury-goods companies convert their revenues from outside Europe into a strengthening euro, it lowers their growth and profits. Companies discussing the euro impacting their latest results include:
• Gucci parent Kering, which cited currency as contributing to a decline in Q3 revenue.
• LVMH Moët Hennessy – Louis Vuitton SA, which said, “the growth in this year’s third quarter was significantly offset by a large negative currency impact. … The weakness of the yen, in particular … resulted in a negative 6 percent impact.”2
• The CEO of Luxottica Group SpA, which makes eyeglasses, said the company is dealing with “unbelievable currency fluctuations”1 this year in countries such as the U.S.
While exporters are often influenced negatively by a rising currency because of their multinational focus, the revenue of small-cap companies is often focused more on the local economy. As of September 30, 2013, the top 10 constituents of the WisdomTree Europe SmallCap Dividend Index had weighted average revenues of 80% from Europe and over 83% of the Index weight is composed of cyclical stocks.