World Economy’s Hold on U.S. Stocks
Sept. 30 -- With weak currencies hammering European sales and oil’s high price dampening global growth, sniping at companies with extensive global exposure has become something of a habit on Wall Street.
And not without reason. Look through the S&P 500 companies with the greatest exposure overseas, and you’ll come across plenty that have lately warned that their third-quarter numbers won’t be up to snuff.
There’s Colgate-Palmolive, with 72 percent of its sales coming from abroad, and McDonald’s, 62 percent foreign exposed. There’s Intel, 57 percent; Kodak, 52 percent; and Lexmark, 56 percent. With bath water like that, who cares about the baby anymore?
But generally speaking, not owning companies with overseas exposure seems like a nonstarter. This is an age of globalism, after all, and market forces are breaking down barriers in a way that neither tanks nor diplomacy ever could.
Accelerating Expansion Overseas“The total trade contribution to global GDP growth is accelerating,” says Lehman Brothers chief investment strategist Jeff Applegate. “That suggests you want to be more globally exposed. Plus, we’re going to have some policy changes. The president will soon sign the preferred trading legislation with China, and next year China is in the WTO.”
But when global growth is winding down, a company that has expanded its footprint overseas may pay a heavy price. When a company links itself to the ups and downs of the world economy, profits become much more cyclical.
This has been the case with consumer staples companies, which have seen earnings growth become more erratic as a result of heavier overseas exposure, notes Merrill Lynch chief quantitative strategist Rich Bernstein.
This is not the way it used to be. It used to be that the U.S. economy was in a boom-and-bust cycle and by expanding overseas you could actually mute the cyclical nature of your earnings.
“Now that emerging markets are starting to mature and show cyclicality, it’s coming back to haunt those companies,” says Bernstein. “Ten years from now, it would not be inconceivable to find that companies have reduced foreign exposure. That sounds like heresy, but it’s an issue that should be considered.”
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