Greenback is a tough taskmaster

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Greenback is a tough taskmaster.

The strengthening US dollar continues to crunch the revenues and profits of those US companies with international earnings. Over the last year the USD has appreciated by 21% against both the Euro and Yen as the European and Japanese central banks aggressively ease monetary policy while the US is looking to increase interest rates. Total revenues for the S&P 500 companies are approximately $10 trillion with roughly a third of these revenues coming from abroad. Therefore, approximately $3.3 trillion of revenue is impacted by the strength of the US dollar. Very rough calculations suggest that a staggering $500 billion could be sliced off the revenues of US companies as a result of the greenback's strength.

Before the hankies come out, we should remember that this dollar strength just reverses an extended period of dollar weakness that has allowed US companies to significantly increase their share of global sales. However the speed of the dollar's rise has presented major challenges to the management of US companies that are now also facing stronger competition from foreign competitors in international markets. These companies have had minimal time to adjust and adapt to the changing environment.

The experience to date from US companies in our portfolio confirms the difficult environment. Many now report on an actual as well as a constant currency basis to highlight the impact of the currency and give a sense as to how well the underlying business is performing. The assessment of management and track record are important parts of our STEEPP process and we are encouraged by management initiatives in many portfolio companies to cut costs, improve efficiencies and reassess capital allocation in response to the dollar's appreciation. As a result, while there may have been some disappointment at the revenue level, this was not repeated at the earnings level where most US companies we hold have outperformed expectations.


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