• High U.S. Revenue Performed Better: Companies with higher domestic revenues or lower international revenues do not see a revenue hit from a stronger U.S. dollar. If these companies import goods from abroad, their costs are actually reduced as the U.S. dollar gains strength. Financials, which includes real estate, and Utilities tend to have the highest percentages of domestic revenue; therefore they are not as negatively impacted by a strengthening dollar. These two sectors have also benefited from the decline in U.S. interest rates over the past year and saw very strong performance over the last year, significantly more than the global-export-oriented firms.
• Low U.S. Revenue Performed Worse: Companies with lower domestic revenues or higher international revenues are typically affected more by currency movements because they have to adjust their earnings based on these movements. This group is primarily made up of multinational companies in the Information Technology, Health Care and Consumer sectors. Firms in these sectors, like Microsoft and Proctor & Gamble, highlighted above, have recently reported negative currency impacts and warned about future impacts if the dollar continues to strengthen.
Who Benefits from a Strengthening Dollar?
• International Equities: Foreign multinational companies have the potential to benefit from a strengthening dollar because their products become less expensive to U.S. consumers, which could increase sales. These companies also benefit as their foreign sales are translated back to their home currency through a more favorable exchange rate, resulting in higher earnings. We think that this is why developed international equities have historically performed better in periods when their currencies were weakening than in periods when they were strengthening.5 Even though a stronger U.S. dollar and weaker euro or yen might improve the profits of European or Japanese companies, the dollar strength can drag down the total returns of U.S. investors who do not hedge their international equity exposure.
In a future blog post, we will examine the performance differential in exporters across different developed regions.
1The Procter & Gamble Company was a 1.93% weight in the WisdomTree LargeCap Dividend Index as of 1/30/15.
2Source: The Procter & Gamble Company, Q2 2015 fiscal year earnings press release, 1/27/15.
3Microsoft Corporation was a 2.59% weight in the WisdomTree LargeCap Dividend Index as of 1/30/15.
4Source: Microsoft, Q2 2015 fiscal year earnings conference call, 1/26/15.
5Sources: WisdomTree, Bloomberg, 12/31/69‒12/31/14.
Important Risks Related to this Article
Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty.