Protect your portfolio from US dollar's strength

Protect your portfolio from US dollar's strength

The US dollar leaves its imprint in every corner of the global economy: from countries’ international reserves to international trade transactions, King Dollar rules the globe. It is also the currency in which vital raw materials are bought and sold, and it is the safe haven to which investors turn in times of trouble. The greenback’s recent surge is a boon for American tourists, but poses challenges for investors and businesses.

Dollar at a 20-year high 

These are volatile times in capital markets, but it has been a wonderful stretch for the dollar - that’s expected to continue for a while. The US Dollar Index, which tracks the dollar against six other important currencies, is hovering at levels it hadn’t reached in 20 years. Since the start of the year, it has gained 10.6%; in the last 12 months, it has risen 15.4%. 

Foreign investors, from governmental bodies through institutions to private traders, have been infusing money into US markets, as a variety of actions that have unsettled the stock and bond markets have worked together to boost the USD’s value against other currencies. Aggressive Fed rate increases to bring down inflation, Russia’s war in Ukraine and global sanctions on Russia, surging commodity prices, China’s lockdowns, and Europe’s economic slowdown, together with a strong risk-off sentiment - all these are behind the greenback’s rally. 

Although the US is in a recession, it is a picture of health compared with many other economies around the world. Add geopolitical instability and much slower foreign central banks into the mix, and it becomes clear why global demand has risen for relatively safe and increasingly higher-yielding assets like Treasurys. The US stock markets also attract foreign attention as they continue to be the largest and most liquid by far, offering countless opportunities even in these difficult times. 

Strong USD: locally sweet, globally sour 

The rising dollar is making life difficult for many US-domiciled global corporations. On top of supply chain disruptions and inflation, they need to worry about the effect of the rising dollar on their profits. A 2018 study by S&P Dow Jones Indices found that S&P 500 companies with the least dependence on foreign revenue tended to perform well when the dollar was strengthening. That appears to be happening now, as the sub-index of the S&P 500, the S&P 500 US Revenue Exposure Index, filled with domestic-oriented companies, dropped 9.1% this year, compared with the S&P 500 Foreign Revenue Exposure Index (composed of companies that derive most of their revenues from overseas), which lost 16.6%. 

Ben Laidler, global markets strategist at eToro, estimates that the rise in the dollar will shave 5 percent off the earnings growth of S&P 500 companies this year, or roughly $100 billion. According to Morgan Stanley, if the USD’s surge continues, the impact may be even higher, as each percentage point of year-on-year increase in the US Dollar Index translates to a 0.5% hit to S&P 500 earnings growth.

According to FactSet, 40% of S&P 500 revenues come from overseas, while Information technology leads all sectors with 58% of revenues derived internationally, followed by materials with 56%, while utilities companies source just 2% of their revenues out of the United States. While large corporations engage in forms of currency hedging to mitigate impacts of currency fluctuations, latest sales and profit reports and projections suggest these companies will not be unscathed.

Dollar-proof, fundamentally strong, AI-recommended

However, investors fearing the effects of the stronger greenback on their portfolio, are not alone in this battlefield. Thankfully, there’s Deshe Analytics’ AI “analyst” that skims through millions of data points within seconds, scanning for companies’ fundamentals and comparing them to their peers - while translating its findings into easy-to-read reports, followed by actionable recommendations. 

Here are a few examples of fundamentally strong US companies that are expected to be less affected by the dollar’s strength than their peers: 

Company Ticker Sector Industry Rating Report

UnitedHealth Group Incorporated

UNH

Health Care Health Care Providers & Services BUY

https://report.desheanalytics.com/nk3

AbbVie Inc.

ABBV

Health Care  Biotechnology BUY

https://report.desheanalytics.com/yc1

NextEra Energy, Inc.

NEE

Utilities  Electric Utilities

STRONG BUY

https://report.desheanalytics.com/6m0

Assertio Holdings, Inc.

ASRT

Health Care  Pharmaceuticals

STRONG BUY

https://report.desheanalytics.com/e7r

Farmland Partners Inc.

FPI

Real Estate  Equity Real Estate Investment Trusts (REITs)

STRONG BUY

https://report.desheanalytics.com/hhn

 

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