Will the dollar’s strength continue? And what does a strong dollar mean for multinational companies? Capital Group portfolio managers Jody Jonsson and Tim Armour discuss.
Capital Group portfolio manager
29 years of investment experience
Kevin Clifford: Jody, if I could follow up with you. When you were talking about multinationals and the impacts, can you give us some examples?
Jody Jonsson: Well, the strong dollar is a real challenge for many of the companies, particularly multinational companies. A number of the U.S. multinationals, like the tobacco companies or some of the household products companies, beverage companies, have really been challenged by the strong dollar, because the majority of their sales are outside the U.S. And just at a time when the economies outside the U.S. are starting to recover and that’s looking better, they now have the challenge of managing this exposure as well.
So we are trying to go company by company and figure out what these impacts are likely to be, but it’s a challenging time for companies to manage through. On the one hand, better economic growth should be helpful for them. On the other hand, changing tax regimes and changing currency regimes can be very challenging on a day-to-day basis.
Tim Armour: Another industry or sector that fits right in with what Jody’s talking about is the pharma industry, because many of or virtually all the pharma companies are multinationals. And some are domiciled in the U.S. Several are domiciled in Switzerland, some in the U.K., a couple in France — of the really big players — and then, of course, you have several in Japan. Now interestingly, most of their sales break down in similar quantities to the different regions around the world — not exactly, but they’re very similar. So what really matters is their domicile and how they’re translating back the currencies of the revenues they’re receiving. So you could have a company in Europe that is benefiting from the strong dollar, and you could have a company with a very similar profile that’s based in the U.S. that’s hurt. These are the kinds of things our analysts are taking into account when they think about a strong dollar or a weak euro or a strong Japanese yen: They’re contemplating what companies to invest in. So it’s really important.
The other interesting piece I’d add on the pharma side is the valuations are very different by region, even though these companies, again, have very similar businesses and similar breakdowns in revenues, many of them. So, as a general statement, some of the European-based big pharma companies are 15%, 20% cheaper than some of their U.S. counterparts. Now why does that make sense? It doesn’t, really. So having people with this kind of experience and knowledge to understand the currency flows and where revenues are really generated and where their earnings are coming from, we’re able to take advantage of some of these dislocations as they’re playing out.