What’s the impact of a strong dollar on US equities?

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Finding opportunities in US equities

What’s the impact of a strong dollar on US equities?

One of the few positive economic stories this year has been the strength of the US dollar.

As inflation gripped markets, and ongoing volatility from the pandemic continued to rattle the finance sector, the dollar’s attraction as a safe haven grew. 

Higher interest rates in the US also added to the currency’s popularity, as foreign investors seeking higher returns drove its its value to multi-decade highs relative to its peers.

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For investors looking to understand the impact of a strong dollar, history can show the winners and losers.

“A strong dollar carries out the same companies every time [a rise] happens,” says Ben Kumar, senior investment strategist at 7IM.

Companies that make the majority of their earnings abroad, including Caterpillar, the industrials firm, will be hurt by the converse decrease in global currencies, as their foreign revenues will be worth relatively less when exchanged back into the dollar.

“But most companies in the US make the majority of their money in the US, and so they are insulated from the impact of the strong dollar than the rest of the world,” Kumar adds.

The case for the US

UK investors have tended to shy away from what they perceive as a complex market, but it is a mistake for them to be underweight the US at this time, says Rupert Rucker, investment director at Schroders.

A lot of European investors will be looking at the strength of the dollar and will think it is more expensive, he says, but these premiums are justified.

“The return on capital here is higher than anywhere else in the world, partly because it is more capitalist and the incentives for companies are aligned with shareholder return, and partly because the economy is a lot stronger and that’s going to persist.”

A much lower reliance on energy imports than Europe has also shielded the US from some of the price uncertainty seen over the past few months, and should continue to do so in future.

Although a slowdown in overall activity in the next few months is likely, both businesses and households have got reasonably strong balance sheets too, and that should insulate them from the disruption occurring within global markets, says Eric Papesh, portfolio specialist for US equities at T Rowe Price.

One of the areas a strong dollar will impact is mega caps, as they will rely more on international earnings, which will be worth less as the purchasing power of Europeans or Asians will be diminished, impacting a company’s revenue scheme.

The companies to look at are those who benefit from lower importing costs.

These could be European prestige autos, says Stuart Clark, portfolio manager at Quilter. 

Foreign beneficiaries

Another area to look at is companies headquartered in Europe but with most of their sales in the US, says David Harrison, manager of the Rathbones Greenbank Global Sustainability Fund.