NCPA - National Center for Policy Analysis


December 31, 2008

One of the smartest plays in the past few years was to invest in companies with fast-growing overseas economies in Asia, the Middle East and elsewhere, while going light on those doing most of their business in the slow-poke United States.

However, the trend might be reversing soon, and already has to a small extent, says the Wall Street Journal:

  • Stocks of companies that book more than 50 percent of their revenue overseas are down 46 percent this year, compared with a drop of only 38 percent for companies with no international revenue.
  • The technology sector is among the most exposed, with an average of 50 percent of company revenue coming from outside North America.
  • Whereas, sectors such as utilities, consumer discretionary and health care get less than 30 percent of their revenue overseas.

One reason for the switch has been the rise in the dollar against many global currencies.  For years, a weakening dollar helped companies doing business overseas profit from the beneficial currency translation when repatriating funds.  Many of these companies were riding a wave of red-hot growth in emerging economies such as a China.  But there are signs of serious weakness in China, says the International Monetary Fund:

  • Electricity output fell 9.6 percent in November.
  • Imports fell 18 percent from a year earlier, while exports slumped 2.2 percent, the first monthly decline in more than seven years.

Weakness is cropping up in developed economies as well.  Japan's exports fell 27 percent in November, compared to a year earlier.  Its exports to the U.S. alone fell 34 percent.

This isn't to say that the U.S. economy will race ahead.  Economists estimate that it will probably contract at least 2 percent in 2009.  But in 2010, the U.S. economy is expected to grow 2.1 percent, compared to 2 percent for the rest of the world.  Investors in U.S.-centric stocks would be the first to benefit.

Source:  Scott Patterson, "Placing Bets on America is Back in Style," Wall Street Journal, December 26, 2008.

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