In a press conference on September 17th, U.S. Federal Reserve (Fed) chairman Jenet Yellen justified the decision to delay hiking interest rates by pointing to global growth concerns. She highlighted how the improvement in the U.S. on a standalone basis likely warranted a hike in interest rates by the Fed1
Regardless of whether the Fed should focus on volatility
in global financial markets as an indicator in its policies, Yellen highlighted an important divergence: U.S. -- centric businesses are seeing better trends than businesses operating in many global markets2
. We see this playing out in both the revenue
sides of companies.
WisdomTree recently established new indexes that focus on U.S. local economy companies and contrasts them with U.S. exporter companies operating on the global stage.
We believe the moves in the U.S. dollar ultimately help determine the relative competitiveness of these baskets. Said differently, sensitivity to the U.S. dollar factor is a proxy of domestically-focused businesses versus multinationals.
The New Dollar Factor
In a rising U.S. dollar scenario, multinational companies that have more global sales exposure would not only lose on translating
sales and profits earned overseas back into dollars, but secularly they’d become less competitive in the global markets, as their goods and services become more expensive to international consumers.
What’s worse, the U.S. dollar has been playing a more prominent role in both the revenues and profits of U.S. corporations in the absence of a robust growth— what Yellen said was the Fed’s concern in delaying the hike.
Some details on these new WisdomTree Indexes (the Strong Dollar U.S. Equity Index (WTUSSD)
and Weak Dollar U.S. Equity Index (WTUSWD)
• Local Economy Focus:
In a nut shell, WTUSSD
selects eligible U.S. companies that derive more than 80% of revenue from within the U.S. With respect to Index Screening, constituents within the energy and materials sectors are excluded3
• Exporter focus: WTUSWD
selects eligible U.S. companies that derive more than 40% of revenue abroad.
• In both cases, the weighting takes into account constituent market capitalization
and the sensitivity of stock prices’ returns to the dollar.
Sales Trends in Strong and Weak Dollar Indexes
We collected the fundamental data of constituents of WTUSSD and WTUSWD and analyzed their sales growth during the recent quarters when the U.S. dollar had risen sharply. Domestic companies (as shown by WTUSSD) fared better than multinational companies (as shown by WTUSWD).
It turns out that the constituents in WTUSSD were able to maintain more stable and better year-over-year sales growth from 3Q 2014 to 2Q 2015 while those in WTUSWD clearly struggled. Going forward, analysts seem to continue favoring the growth prospect of WTUSSD versus WTUSWD, although the gap is expected to close up gradually4
. It is hard for analysts to determine moves in businesses caused by multinational currencies, and they often are surprised by currency impacts.
WisdomTree Strong Dollar (WTUSSD) & Weak Dollar (WTUSWD) U.S. Equity Index
Year-over-Year Sales Growth
For Local Economy Focus: Strong Dollar U.S. Equity Index
The trend in factor-based
or so-called “smart beta
” investment strategies has focused on common factors such as value
, and low volatility
. WisdomTree believes currency can also be a critical factor explaining various market returns, even within the U.S. markets. While the real time results are relatively new—as just about four months of performance exist with these indexes being live—we are witnessing a wide divergence in the returns between the strong and weak dollar strategies.
Given the chart illustrating how long it takes for the dollar to feed into the competiveness of the exports, we still may be early in this cycle of performance for U.S. local economy companies.
Source: Board of Governors of the Federal Reserve System press release, 9/17/15.
Source: Jon Hilsenrath. “Fed’s Rate Decisions Hang on Dollar, Growth Concerns.” The Wall Street Journal. April 22, 2015.
Subsequent to Index screening it is possible that a current constituent may spin off a subsidiary company that may be classified as an Energy or Materials firm. Spin off firms that remain within the Index do not get removed between Index rebalances due to their sector classification.
Source: Factset consensus analyst expectations for current constituents of WTUSSD and WTUSWD Indexes as of 6/30/15 quarterly reporting.