Here’s how a strong dollar will hurt investors in 2015
By Jeff Reeves
Published: Jan 5, 2015
But you can revamp your portfolio to gain protection
Large U.S. companies are forgoing bigger sales because of the strong dollar, which makes their goods cheaper abroad, hurting profits.
Over the holidays, I had a few conversations about investing with friends and family.
It’s always interesting to see what misconceptions “normal people” hold about investing strategies. And one of the biggest misunderstandings, I found, regards the danger posed by a strong dollar.
Admittedly, it’s a bit counterintuitive. It seems natural for Americans to want a strong currency. And, of course, there are specific strategies that can take advantage of a strong-dollar environment.
But in 2015, one of the biggest risks to most investment portfolios is the continued weight of a strong dollar holding back key asset classes. And investors who don’t understand or acknowledge this could pay the price.
Here’s a basic rundown of the threat posed by the continued strength of the greenback, and how investors can protect themselves.
Strong dollar hurts large U.S. companies
Many of the largest U.S. companies are actually reporting smaller sales numbers because of a strong dollar. That’s because they do a high volume of business overseas, and since those sales are recorded in currencies that are comparatively weaker, it’s like these multinationals are actually selling their goods at a discount.
Consider that conglomerate 3M MMM, -0.16% recently said a strong U.S. currency will actually result in a reduction of total sales by 2% to 3% in 2015.
And it’s not just the top line taking a ding. McDonald’s MCD, -0.47% said currency pressures could reduce fourth-quarter earnings by up as much as 7%. At Coca-Cola KO, -0.19% the outlook is even worse, with the company warning that operating income could be hit by 9 percentage points in the fourth quarter.
In short, the more business you do overseas, the more you are hurt when you take those sales in weak currencies and convert them into greenbacks.
Strong dollar hurts commodity stocks
Another significant area affected by a strong U.S. currency: dollar-denominated commodities, from steel to crude oil to soybeans.
As the dollar rises in value versus other currencies, commodity prices fall because you get more bang for your buck. Instead of thinking about the dollar as fixed and commodity prices as fluctuating, think of it this way: If you (or any global buyer) can buy one barrel of oil for $100 today but then the dollar keeps increasing in value, you might be able to buy two barrels of oil for that same $100 in a year or two.
This sounds great for motorists, who like cheap gas. But what if you’re an oil driller or refiner with a $600 million deepwater rig you took a loan out on, and big monthly payrolls to meet regardless of crude oil prices?
Now apply that same pain to miners with expensive digging gear that extract increasingly cheap metals, and farmers who get increasingly less for their harvests despite spending big on seeds, pesticides and agricultural equipment.
Just look at commodity-focused ETFs for the real impact of the strong dollar on commodity stocks lately.
The Market Vectors Agribusiness ETF MOO, -0.10% is down 2% in the past year versus a gain of almost 13% for the S&P 500. The Energy SPDR XLE, +0.47% is down almost 10%, the Market Vectors Gold Miners ETF GDX, +3.05% is off 17%, and the iShares MSCI Global Metals & Mining Producers ETF PICK, -0.80% that excludes precious metals is off by more than 20%.
Strong dollar hurts emerging markets
It’s not just these flavors of U.S. equities that are feeling the pain, either. There also is a big international impact because of a strong American currency.
Take Argentina, which defaulted on its sovereign debt in 2014, in part, because of a strong U.S. dollar. Argentina had pegged its currency to the U.S. dollar and saw its peso abnormally strong in recent years as a result. It suffered the same problems outlined above, with sales outside its borders yielding less and less. With Argentina heavily dependent on exports to its neighbors and without a mature or flexible economy, the government simply rolled over.
The effect also is felt by nations that don’t have their currency pegged to the dollar.
Take another extreme example in Venezuela. The government owes tens of billions around the world, with much of that debt denominated in U.S. dollars. Since the nation’s currency continues to drop, it takes more and more local money to pay down the same amount of debt, putting the nation at a very high risk of a bond default in 2015.
Now, Venezuela and Argentina both had plenty of other problems over the past few years that have led them there. But the dollar’s strength has assuredly played a role, and will continue to do so in a number of emerging markets around the world in 2015.
It’s important to remember that emerging markets typically are very reliant on commodities because they lack a strong consumer class or a high-tech service sectors. Take copper-rich Chile, where the base metal represents more than half of total exports. Even though only about 12% of the iShares MSCI Chile Capped ETF ECH, -1.20% is in the materials sector, the fund is down about 15% in the past year because of the big pain caused by a strong dollar in this commodity-dependent nation.
How to protect your portfolio in 2015
I’ve listed a number of investments that are in trouble thanks to a strong dollar. But what about opportunities?
To me, the biggest such opportunity lies in Europe.
This opportunity is not without risk, considering a top European economist just warned the world that deflation is very likely in the eurozone next year. But a persistently strong dollar and a weaker euro may actually help stabilize prices.
Furthermore, while a strong currency hurts exports and multinationals in America, the opposite is true in Europe: A weaker currency would help exports to America, benefiting European companies that do lots of business in the U.S.
Besides, I’m a long-term investor looking at opportunities over the next few years, not only the next few weeks. So given the outperformance of U.S. equities, it may be prudent to rebalance your portfolio into a more global flavor for 2015, with the Vanguard Total International Stock ETF VXUS, -0.27% as a great foundational investment for any portfolio.
If you’re into more focused bets with a bit more risk, consider a direct play on major exporter Germany via industrial giant Siemens SIEGY, +0.69% which uses the euro as its base currency. The company pays a robust dividend of 3.6%, and is a global leader in automation technologies that are undoubtedly the way of the future for businesses of all shapes and sizes.
www.marketwatch.com/story/heres-how-a-strong-dollar-will-hurt-investors-in-2015-2015-01-05?page=2