Fundamental drivers more important than FX

While a stronger US dollar can be both positive and negative for the performance and profitability of individual US equities, we still be-lieve the overall asset class is poised to deliver attractive interme-diate and long-term returns. Typically, the negative impact of a strong dollar on corporate profits is derived from currency translations, or profits outside of the US needing to be translated for financial re-porting purposes. Many companies within our Fund hedge currency transactionally, but hedging transla-tion is expensive and difficult to model. A stronger dollar also makes exports more expensive, which could lead to lower volume growth. However, the negative effects tend to be short-term, as management teams react by adjusting pricing.

Ed Cowart, Eagle Asset Management

Many benefits lower $

On the other hand, the benefits of a stronger dollar are numerous. Input costs decline, the cost of outsourc-ing declines, the US consumer ben-efits from lower prices for imported goods, and inflation is restrained. Perhaps most importantly for the equity market, US-denominated equities benefit from an inflow in international funds. From a valua-tion perspective, US equity multi-ples tend to move with the dollar. Many of the large cap companies we invest in are multi-nationals and tend to have a higher portion of overseas revenues. However, the smaller cap companies are likely to have much lower exposure. From a portfolio perspective, less than one-third of the revenues generated from our holdings come from inter-national sources.

S&P 500 history

Bron: Eagle Asset Management

Various influences

More importantly, we pay close attention to the actual impact the dollar has on revenues and profits derived from overseas. What we have found is that competitive dy-namics, internal improvements and management execution are more significant drivers of stock price performance than FX. For example, home-goods company Tupperware has outperformed the market year-to-date, despite deriving approxi-mately two-thirds of its revenue overseas. But domestic rail compa-ny Union Pacific has underper-formed, despite having very little revenues generated internationally.

Accordingly, it is important to rec-ognise a stronger dollar is just one piece of the story for US corpora-tions. From a broader economic perspective, the US should see stronger economic growth against other global economies and – in our view – earnings growth is set to surprise on the upside relative to low expectations. Additionally, history would suggest a more nor-malised interest-rate environment supports higher equity valuations and those valuations at this point do not look particularly stretched relative to the rest of the world.