As investors weigh the implications of Brexit for their portfolios, I thought it would be useful to evaluate how exposed U.S. companies are to the United Kingdom and the European economy.
The answer: Across a vast majority of WisdomTree’s U.S. exposures and indexes covering the U.S. markets, there is surprisingly little direct revenue that comes from the United Kingdom, and modest amounts that come from Europe more broadly.
At the low end of exposure to Europe, the WisdomTree Strong Dollar U.S. Equity Index was designed to identify companies that are focused on the U.S. domestic markets from a revenue-generation perspective. It should not be a surprise, therefore, that the United States makes up 95% of the revenue for this Index and Europe generally only represents 1% of revenue. If investors believe the U.S. economy is the strongest of a global group, this is one Index designed with a U.S. local revenue base in mind.
But mid- and small-cap companies are also known for their more domestic-facing businesses. Three of our U.S. small-cap Indexes have a domestic revenue profile that ranges from 76.5% at the low end (for the WisdomTree U.S. SmallCap Quality Dividend Growth Index) to 82.4% at the high end (for the WisdomTree SmallCap Dividend Index). The UK revenue exposure in all these Indexes is less than 2%, while eurozone revenue exposure is less than 5%.
Going up the size spectrum to mid-caps, we see modest increases in European exposure, but the U.S. revenue exposure in both WisdomTree mid-cap Indexes is greater than three-quarters of their revenue, and eurozone exposure is also less than 5%.
At the high end, one of the more global U.S. Indexes is the WisdomTree U.S. Quality Dividend Growth Index, which had 60% of its revenue from the U.S., 7.5% from the eurozone and 2.4% from the United Kingdom. An interesting attribute of this index, though, is that emerging markets, at approximately 14% of the revenue, represent greater exposure than all of Europe, which is at just 11%. What happens in China is likely going to have more of an impact than what happens in Europe.
WisdomTree Indexes Regional Revenue Exposure
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The market sell-off immediately following Brexit had less to do with a direct impact on slower economic growth or lower revenue/earnings from the United Kingdom or Europe, and more with spikes in risk aversion and negative sentiment surrounding what the Brexit means for the future of the eurozone, particularly many of the European banks. Will there be other European countries leaving EU in the UK’s footsteps? This will remain an open question for some time.
Investors focused on the fundamentals—and WisdomTree’s equity Indexes typically focus on the dividends companies pay or the earnings they generate—provide an income-oriented approach to the markets. Any market sell-offs for U.S. companies likely should be viewed as market noise, given what little direct revenue from the eurozone or the UK is generated across most of corporate America.
Important Risks Related to this Article
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