The effects of a stronger U.S. economy and currency are now clearly evident in stock performance, and this has major implications for investors in U.S. multi-national companies.
The chart below compares the performance of S&P 500-listed U.S.-based multi-national companies with 40 per cent or more foreign revenue, with more domestically-focused companies.
Foreign Revenue-focused S&P 500 companies
Average Return, U.S. Multinationals with Greater Than vs Less Than 40% Foreign Revenue
SOURCE: Scott Barlow/Bloomberg
In every period on the chart, U.S. companies with more domestic revenue outperformed more globally-focused stocks. In the past 12 months, multi-nationals have underperformed by almost 400 basis points.
This clear trend is explained by the relative strength of the U.S. economy and the sharp rally in the U.S. trade weighted dollar. Revenue and profit growth for companies operating in Europe, Japan and Asia has been limited by the slowing economic growth in these regions. Also, the rising greenback has reduced the value of what revenues are generated overseas when converted back into dollars.
While the global economy slows, the outlook for the United States is improving. For the first time in three years, economists expect that 2015 U.S. economic growth will be stronger than the global average.
Canadian investors should focus on U.S companies that generate the majority of revenue in their own country. This strategy maximizes the benefits from a strengthening American economy while dodging the profit-limiting effects of global economies in temporary decline.
Follow Scott Barlow on Twitter @SBarlow_ROB.