InvestmentsFeb 17 2015

Invesco’s Clinch: Dollar strength will weigh on US market

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Invesco’s Clinch: Dollar strength will weigh on US market

Invesco Perpetual’s Simon Clinch has sounded a warning about his own asset class, declaring “it is hard to see why equity markets should rise further”.

The co-manager of Invesco Perpetual’s US Equity fund said the growing strength of the dollar will be a watershed for US companies, especially multinationals.

He said US-listed companies with extensive operations overseas will be faced with a tough choice as the dollar rallies, to raise prices in local currency terms in order to protect their profits or keep prices the same to protect their market share.

From the end of June 2014 to the end of January 2015, the dollar rose by 21.3 per cent against the euro and by 13.5 per cent against sterling, registering double digit gains on most major world currencies.

This “extraordinary” move in the currency will have an impact both on US company earnings and on the stockmarket.

He said: “After more than a year of significant multiple expansion, we believe that further market gains will need to be driven by earnings, and the strength in the US dollar risks dampening earnings growth for the year, particularly if the gains continue.”

Mr Clinch gave the example of Philip Morris International, the US-listed tobacco company that derives all of its earnings from overseas.

Consensus broker forecasts for its earnings have fallen by 19 per cent since September 2014, according to Mr Clinch, largely thanks to the move in the dollar.

He said: “Other companies with international exposure are experiencing the same effects with varying magnitudes, but the clear reality is that earnings expectations for 2015 are likely to come down further as management teams provide their financial outlooks during the current reporting season.”

The strength of the dollar is also likely to hit tourism in the US, as visitors look to spend less given the steep exchange rate.

He said the factors around dollar strength would weigh on the market into 2015 and, given the strength of US stocks in recent years “it is hard to see why equity markets should rise further”.

However, in spite of the downward pressure on earnings from the strong dollar, UK investors could still derive gains from US investments as “a strengthening dollar should boost the value of US stock investments for foreign investors”.