Home > CFA L2, equities, fundamental analysis, quantitative analysis > CFA learnings applied – The Dollar’s Impact on Stocks So Far in 2011

CFA learnings applied – The Dollar’s Impact on Stocks So Far in 2011

Bespoke has a nice post on the impact of US Dollar’s depreciation on earnings of US companies… this is a very simple yet very applied example of the CFA Level 2 reading on Multinational Operations.

The US dollar index (trade weighted measure against other currencies) is down about 3% in 2011. How does this affect earnings of US companies? US companies can be broadly classified in to two categories: those that do 100% of business is in US and in USD and those that do a significant share of their business globally… it is the second category of companies that are most affected by currency fluctuation…

Source: Bespoke Investment Group

How does USD depreciation affect stocks?

When the dollar is rising, US companies that do most or all of their business within our borders stand to benefit, while US companies with large amounts of revenues outside of the country lose out. The opposite occurs when the dollar is declining — companies with large amounts of international revenues benefit at the expense of the domestics.

If the above is not intuitive, visit my earlier post here.

As shown in the second chart below, the average YTD performance of stocks in the decile with the largest percentage of international revenues is 7.68%, which is by far the best performing decile. The average YTD performance for stocks with no international revenues is 3.09%. This performance is inline with what one would expect given the dollar’s decline.

Loosely speaking, about 3-4% of the 7.68% rise in the top performing decile can be attributed to currency depreciation and the rest to the general market rise…

Going forward, if you expect the dollar to continue its decline, the stocks with large amounts of international revenues should continue to outperform. If you expect the dollar to reverse course and head higher, the stocks with little or no international revenues should start to pick up.

Source: Bespoke Investment Group

Advertisements
  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: