If anything is being illustrated from the Q3 earnings reports coming out of the US right now, it’s that the strong US dollar is wreaking havoc on the bottom lines of many big US-headquartered international companies.
While the dollar is still riding high against other currencies, is now the time to invest in these companies? Their revenues are generally still beating expectations, but difficulties with the exchange rates could be ongoing for some time.
Whatever direction you see the markets heading in, remember that you can always profit from short-term bearish and/or bullish trading conditions of numerous markets (Forex, shares, indices, etc.) with the help of a regulated and well-regarded broker, such as easymarkets.
Let’s now take a brief look at how the dollar’s strong run influences major companies, and how they might be dealing with it.
How does a US-based company lose out when the dollar is strong?
The difficulty these companies are facing really boils down to the fact that their earnings are declared in USD, but they conduct business all over the world. The value of their profits in USD decreases when the USD strengthens against other currencies, as they need to convert back their earnings in foreign currencies into US.
A simple example that most people would be familiar with is the McDonald’s Big Mac. The price of a Big Mac in the US is around $5. When it’s sold in the US, the company adds that $5 to its revenue. Pretty simple stuff.
But Big Macs are sold in basically every country you can think of though, and they’re priced in the local currency, whatever that may be.
Let’s say that a burger in Germany is worth around €5. At the time of writing the USD/EUR is at around parity, but in October last year, that €5 was actually worth around $5.80 in US dollars. Therefore, that international Big Mac was earning an extra 80c compared to what it is now. That’s pretty significant multiplied by millions of burgers.
Companies can reduce their exposure to the risk of the foreign exchange rate by using the hedging strategy. But many choose not to, as the added costs associated can be hard to justify if they make a wrong call on the movement of currencies.
What does this mean for investors?
Lower company earnings mean a drag on portfolios and fewer returns to investors, but it’s anyone’s guess how long these conditions will last. It could be months or even years before the dollar levels out with other major pairs.
Most experts would advise against making big changes to your portfolio during times like these, as things can change quickly. You can potentially make a few small tweaks that may help hedge against the downside risk without straying too far from your overall investment goals, though.
Think about holding positions in companies that aren’t as big on the international stage yet and are therefore less affected by exchange rates. Also, look into sectors that expect to make all of their profits from where they’re headquartered in the US, like real estate for instance.