Rallying S&P 500 Never Cheaper in Europe on Dollar
Oct. 12 (Bloomberg) -- Investors outside the U.S. arepurchasing companies in the Standard & Poor’s 500 Index at thecheapest valuations on record, their buying power boosted by aseven-month decline in the dollar.
The S&P 500 is priced at 19.9 times earnings, the biggestdiscount to the MSCI World Index of 23 developed countries sinceMay 2003, according to monthly data compiled by Bloomberg. ForEurope-based money managers, currency translations push theaverage cost for a dollar of U.S. profits down to 13.6 euros,the lowest level ever relative to global equities and a discountthat investors in America have never enjoyed, data compiled byBloomberg show.
Overseas investors that hold almost $2.5 trillion in U.S.equities are getting a bigger slice of corporate America witheach euro, yen and pound they spend just as S&P 500 companiesfrom PepsiCo Inc. to General Electric Co. post higher overseassales. While more losses in the dollar would cut returns, thelast time U.S. stocks were this inexpensive, in 2003, the S&P500 began a four-year, 62 percent advance.
“What you’re getting is the opportunity to buy globalcompanies that have become cheaper because of the dollar andmore competitive,” said Antony Gifford, a London-based managerat Henderson Global Investors, which oversees $87 billion. “Ifyou can buy global secular growth at a discount because it’sdollar listed, then why wouldn’t you?”
Stocks Advance
The S&P 500 climbed 4.5 percent to 1,071.49 last week, thebiggest gain since July. Data from the Tempe, Arizona-basedInstitute for Supply Management showed U.S. service industriesgrew in September after 11 months of contraction while AlcoaInc., the largest U.S. aluminum producer, reported an unexpectedthird-quarter profit as the New York-based company cut jobs andraw-material costs faster than analysts projected.
The S&P 500 added 0.4 percent to 1,076.19 today in NewYork, its highest close since Oct. 3, 2008. The MSCI Worldgained 0.5 percent, while Europe’s Dow Jones Stoxx 600 Indexrose 0.7 percent as Royal Philips Electronics NV reported anunexpected third-quarter profit.
The dollar fell 11 percent against the euro and yen and 7.4percent versus the pound in the past six months. The currencywas driven down as the U.S. government and Federal Reserve lent,spent or guaranteed $11.6 trillion and the central bank keptinterest rates at near zero to combat the worst recession sincethe 1930s.
The U.S. Dollar Index traded as low as 75.767 last week,6.7 percent above its record low of 70.698 in March 2008.
Earnings Gap
Profits for U.S. companies have dropped less than those inthe MSCI World Index, helping increase the valuation gap withthe S&P 500. Santa Clara, California-based Intel Corp.,GoldmanSachs Group Inc. in New York, GE and 28 other S&P 500 companiesare scheduled to report results this week.
The MSCI World has surged 66 percent since March 9 throughlast week as its companies reported an average 40 percentdecline in second-quarter earnings, data compiled by Bloombergshow. The S&P 500 rose 7 percentage points less even as itscompanies posted a profit decline that was 11 points smaller.
The MSCI World was valued at 27.7 times the earnings of its1,659 companies in September, exceeding the S&P 500’s ratio by7.75 points, according to monthly data compiled by Bloomberg.That’s the cheapest level for the benchmark gauge for U.S.stocks since May 2003, when the index was beginning to recoverfrom a 2 1/2-year bear market that cut its value by 49 percent.
‘Positive Bias’
“The valuation for the market is still below normallevels,” said Jason Pride, director of research at HaverfordInvestments, which oversees $6 billion in Radnor, Pennsylvania.“We still believe there’s a fairly good, positive bias in thedirection of the market.”
Foreign investors owned $2.47 trillion in U.S. commonequity as of June 30, 2008, according to data from the TreasuryDepartment. That’s equal to about 16 percent of the total valueof the American stock market, data compiled by Bloomberg show.
Net foreign purchases of U.S. shares rose to $28.6 billionin July from $19.1 billion the previous month, the Treasurysaid. Overall international demand for long-term U.S. financialassets weakened in July as investors cut purchases of bonds.
Officials in emerging economies such as China and Russiahave questioned the dollar’s dominance in the global economy asthe federal budget deficit reached $1.4 trillion in the yearended Sept. 30, according to the Congressional Budget Office.The Treasury will release August data for net transactions byforeigners in long-term U.S. securities on Oct. 16.
Paris and Frankfurt
For overseas investors buying stock with currencies thatappreciated versus the dollar, shares of S&P 500 companies maybe an even bigger bargain relative to global equities.
Adjusted for euros, earnings for S&P 500 companies areabout 50 percent cheaper than those in the MSCI World, datacompiled by Bloomberg show. That makes U.S. stocks lessexpensive now for money managers in Paris and Frankfurt thanthey were for American investors near the end of the bear marketin 2002, when S&P 500 companies sold for a record 42 percentless than the average global ratio.
Investors in the U.K. can buy a dollar of profit generatedby S&P 500 companies for an average of 12.8 pounds, a 54 percentdiscount to the MSCI World, while annual per-share earnings ofU.S. companies cost 1,820 yen, 34 percent less than the MSCIWorld.
Using the weighted exchange rates of the six currencies inthe Dollar Index -- the euro, yen, pound, Canadian dollar,Swedish krona and Swiss franc -- the S&P 500 is currently valuedat 14.7 times earnings. The S&P 500 last month traded at thebiggest discount to the MSCI World on record, when adjusted forthe six currencies, monthly data compiled by Bloomberg show.
Owning Profits
Converting U.S. corporate profits into foreign currenciesat today’s rates would eliminate the discount in the S&P 500created solely by exchange. Priced in dollars, the U.S. index is27 percent cheaper than the MSCI World, close to the biggest gapin six years.
Adjusting the price of the S&P 500 for currencies in theDollar Index is a way of gauging the relative cost of U.S.earnings to overseas investors and predicting which country’sstocks may rise or fall more, said Jack Ablin, chief investmentofficer of Harris Private Bank in Chicago.
“The U.S. stock market is on sale,” said Ablin, who helpsoversee $60 billion. “On a level playing field, the dollar ischeap to our trading partners’ currencies, so they’re able toget a reasonably priced S&P 500. It’s an argument that makessense.”
While the drop in the dollar may entice more internationalmoney managers and provide a boost to U.S. profits, moreweakening would erode the value of American stocks owned byoverseas investors, offsetting gains in share prices.
Snubbing Dollars
The S&P 500’s 58 percent rebound from a 12-year low onMarch 9 shrinks by 22 percentage points when measured in eurosand 15 percentage points in yen, Bloomberg data show.
Central banks are increasingly snubbing dollars in favor ofeuros and yen, data compiled by Bloomberg show. Nationsreporting currency breakdowns put 63 percent of the new cashinto euros and yen in April, May and June, data from London-based Barclays Capital show. That’s the highest percentage inany quarter with more than an $80 billion increase.
“The decline in the dollar makes it less expensive to buyU.S. equities -- that’s a fact,” said Walter Harecker, aVienna-based fund manager at Constantia Privatbank AG, whichoversees $15 billion. “But keep in mind that with thedepreciation of the dollar, you’ll have a loss on that. Thenit’s not a good effect.”
‘More Cautious’
The profit growth forecast for S&P 500 companies byanalysts for 2010 is 11 times faster than the expansion in U.S.gross domestic product projected by economists surveyed thismonth, the highest ratio on record, data compiled by Bloomberggoing back 60 years show. The average ratio is 6.1.
“We’re getting more and more cautious with the rally we’veseen,” Harecker said. “Valuations aren’t cheap anymore,considering the health of the economy.”
Lower prices relative to the world boosted American stocksin the past. The benchmark gauge of U.S. equities ended a three-year slump in 2003, surging 26 percent as the Fed held overnightborrowing costs at 1 percent and the economy expanded at anaverage of 4.6 percent in the last three quarters. Over the nextfour years, the S&P 500 added another 41 percent to reach arecord of 1,565.15 on Oct. 9, 2007.
The S&P 500 has become at least 10 percent cheaper than theMSCI World based on earnings on two other occasions since 1995,in June 1998 and August 1999, monthly data compiled by Bloombergshow. Both times the S&P 500 climbed at least 14 percent overthe next year, outperforming the MSCI World by an average 4.9percentage points, Bloomberg data show.
Higher Profits
A weaker local currency is also helping to boost profits atU.S. companies, which are generating more of their revenueinternationally. Last year, S&P 500 companies had 47.9 percentof their sales abroad, the highest level since at least 2003,data compiled by New York-based S&P and Bloomberg show.
The decline in the dollar makes American companies morecompetitive outside of the U.S. because their exports becomecheaper to sell, while the value of foreign-currency denominatedsales increases in dollar terms.
PepsiCo, the world’s largest snack maker, reported a third-quarter profit last week that beat analysts’ estimates, helpedby an increase in international sales. The Purchase, New York-based company said currency translation lifted sales at itsEuropean unit by 14 percentage points and added 19 points ofrevenue to its Latin America foods division.
PepsiCo, GE
Currency translation accounted for 6 percentage points ofthe 8 percent reported gain in PepsiCo’s operating profit.
A weaker dollar may also help bolster earnings at GE, whichgenerated 53 percent of its revenue from abroad last year, datacompiled by Bloomberg show. The Fairfield, Connecticut-basedcompany that makes everything from mammography equipment to jetengines and refrigerators is scheduled to post results Oct. 16.
‘It’s best to invest more in U.S. stocks,” said Louis deFels, a Paris-based manager at Raymond James Asset ManagementInternational, which oversees about $35 billion. “They arebenefiting from a weak dollar and that’s not about to change.The more the dollar declines, the more exports will be strong.”
To contact the reporters on this story:Michael Tsang in New York at mtsang1@bloomberg.net;Adria Cimino in Paris at acimino1@bloomberg.net.
Last Updated: October 12, 2009 16:58 EDTSource: Bloomberg
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