How The Value of The Dollar Effects Your Portfolio
By Anthony
Rhodes
One
of the great advantages of the stock market is that it allows us to view the
entire growth cycle of companies. We can peer, as they transform from small cap
hopeful, to mid cap titan, to large cap behemoth. Along the way, some of these
companies (for reasons involving competition, necessity or opportunity) become
multi-nationals, and expand their offerings around the world. When this takes
place, such corporations no longer have to concern themselves simply with the
day-to-day challenges of growing and maintaining their businesses, but must
also face another reality; one which can have a certain and definitive effect
on their bottom line.
Those
investors who own multi-national stocks may marvel at the advantages which are
inherent among these giants, such as lower competition, greater resources and
higher visibility, but the important matter of just how valuable the U.S.
currency is at any particular time, may elude them. This week, we’ll seek to research
this matter in greater detail. We’ll also attempt to point out that why owning
investment giants can have a positive impact on the value of your portfolio,
under certain circumstances, it may also contribute to its underperformance.
Low Equals High, Weak Equals Strong
Without
getting into a lecture on economics, it’s important to understand the
undeniable effects of inflation. Basically, when inflation is high, goods and
services are more expensive, and as a result consumers wind up spending less.
When this occurs, corporations generate less revenue, and begin to adjust
themselves to reflect the current economic environment (which may include
laying workers off or decreasing spending). The ways in which a country manages
inflation is an indicator of its overall health; and therefore is reflected in
its currency’s value. Those who do this well generate positive economic
activity, and their currency is viewed as strong, and those who don’t are not
as productive, and their currency is deemed weak. Herein lies the problem for
multi-nationals. When an American corporation operates in another country, the
value of the dollar dictates its revenue. A strong dollar means that its products
are less expensive to outsiders, (because their home currency decreases against the dollar; allowing
them to purchase more for less) which erodes profits. It also means
that the corporations’ purchases outside
of America are more expensive (because the dollar increases against the country’s currency; forcing them to purchase less for more). For multi-nationals, this situation doesn’t just happen with
one country, but with many, and is reflected in its earnings. This is why you often hear CEO's of large companies
complain about the ‘strong dollar’. As an investor, it’s important to
understand this economic give and take, and how it ultimately impacts your
portfolio. But it’s also important to note that this exchange works in the opposite
manner, as well. So when the dollar is weak, the advantage again shifts to
multi-nationals. If your portfolio includes large cap multi-nationals, it may
behoove you to pay a little more attention to the value of the dollar. Watching
economic news shows, researching information on the Internet or talking to your
financial advisor will keep you more informed on its movements.
The
dream of every investor is to own a company as it moves completely through to
its maturity; ultimately becoming a giant. But sometimes, as it relates to our
investments, bigger doesn’t necessarily mean better.
(Anthony
Rhodes is the President and owner of wealth management firm The Planning Perspective www.theplanningperspective.com)
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