‘Trump Trade’ Gets Further Blow from Weak Dollar
Dr. Jan-Carl Plagge, Head of Applied Research
Exporters have widened their lead over domestic business in the US equity market.
Skepticism about the US Administration’s capacity to stimulate the domestic economy has become more palpable in the stock market during the summer months.
Following President Trump’s election on Nov. 8, investors bid up companies whose revenues are tied to the domestic economy. The positioning was a bet that Trump would roll out tax cuts and increase spending to boost demand at home.
On the flip side, investors worried that Trump’s anti-globalization and anti-trade rhetoric during his campaign would hamper export-oriented companies.
Those bets reversed in the first quarter, as the government appeared incapable of passing key legislation through Congress. Since the summer, the rotation against domestic-oriented businesses has accelerated amid a drop in the dollar, which is likely to help exporters.
Chart 1 looks at the performance of the STOXX TRU™ USA 100% index, whose components are companies that raise all of their revenue at home, against the blue-chip STOXX® USA 50 Index. The latter has no geographic revenue sourcing limitations, and hence includes many highly capitalized multinationals.
The relative performance of the two indices reflects the shift in investors’ expectations. After Nov. 8, the outperformance of the TRU USA 100% peaked at 544 basis points on Dec. 8, before the index reduced its lead. The USA 50 index has overtaken the TRU USA 100% index and on Sep. 7 took its post-election lead against the TRU USA 100% to a high of 462 basis points, a 10 percentage-point recovery.
As Chart 1 shows, the index comprising the shares of multinationals (red line) overtook the domestic-focused one (blue line) in late April, and their outperformance has widened over the summer.
The STOXX True Exposure™ Indices (STOXX TRU™) are constructed by not only taking into account a company’s country of incorporation but also its regional source of revenue generation.
Dollar already weighing on corporate earnings
The dollar jumped more than 10% against the Eurozone currency in the six weeks following Trump’s victory, on expectations of new reflationary policies. However, its performance has turned out quite the opposite this year. The greenback has tumbled 14% against the euro in 2017, and has fallen 8.7% against a basket of currencies.1
The decline in the value of the dollar is beneficial for export-oriented companies as their foreign sales become relatively cheaper and more competitive in foreign currencies. Overseas demand drove the best earnings season for US companies in 13 years in the second quarter, Bloomberg reported last month.2 From April through June, American companies with large overseas revenue beat sales and earnings estimates twice as often as those with a domestic focus, the news agency reported, citing data from Bank of America Corp.
Euro may have risen too fast, too far
Some strategists warn that investors may be pricing in little chances of Trump passing on his legislative agenda, leaving room for positive surprises. Likewise, the euro – with its history of downward cycles – could unwind some of this year’s gains.
Any shift in the trends described above could cause a return of the ‘Trump trade.’
STOXX TRU™ USA 100%
STOXX® USA 50
1 As measured by the US Dollar Index.
2 ‘Corporate America Is Having Its Best Earnings Season in 13 Years,’ Bloomberg, Aug. 11, 2017.