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)