US Stock Market Return in Foreign Currencies – A Global Picture


The chart for the S&P500 valued in foreign currencies


US Market return in percentages in foreign currencies since 2000

The first decade of the new millennium was known to US investors as a lost decade. Investors experienced two dramatic market crashes following the 1990s internet bubble and the 2000s housing bubble. Even with the help of money printing from the US government, the investment return of the broad market as measured by S&P 500 is just barely positive since January of 2000. As of today, the S&P 500 index itself is still 13% below its starting point at 2000. The positive overall market returns are mainly from the dividends of the S&P 500, which currently yield at a level of less than 1.8%.

If the picture is not gloomy enough, ask the foreign investors who have invested in the US market over the past decade. Since the last time US had its a budget surplus in the 2000, US dollar has lost value against all major foreign currencies. For instance, if an Australian investor converted 100 Australian dollars into US dollars at the beginning of 2000, he’d receive $65 US dollars. If he did nothing with the money and convert back to Australian Dollar in June 2011, his original $100 became $62.1. He lost 37.9% due to the devaluation of US dollars.  As we mentioned above, the S&P 500 index itself lost 13% since Jan. 2000. Therefore, what the Australian investor sees is that the index lost the combination of 13% in stock market and the 37.9% in US dollar devaluation, which resulted in a loss of close to 50%.

The situation is similar for investors from Japan, any Euro Zone countries, Canada, Switzerland  and even China. The Swiss investor lost the most among all because they had the strongest currency. China has pegged its currency with US dollar for most of the past decade. But their currency still appreciated 23% against the US dollar. Switzerland had the strongest currency among all.

The return is much better for British investors, especially in the last 5 years, as the country faces a similar budget problem and its currency weakened.
GuruFocus has calculated the performances of the US market in foreign currencies since 2000 and will update the data daily. The chart for the S&P500 valued in foreign currencies is below:

S&P500 in World Currencies Current Value Last change (%) YTD Return (%) 12 Months Return (%) 3-Year Return (%) 5-Year Return (%) 10-Year Return (%) Since Jan. 1, 2000
USA (US Dollar) 1461.89-00029.436.431.3-0.5
Australia(AUD) 1393.91-0.10020.413.6-11.4-37.7
Canada(CAD) 1441.42-0.10023.925.91-32.1
China (CNY) 9109.91-0.10026.224.5-1.2-25.1
Swissland (CHF) 1345.96-00031.222.7-4.1-42.5
EuroZone (EUR) 1113.67-00032.753.722.6-23.7
Great Britain (GBP) 907.540.60023.338.646.3-0.2
Japan (JPY) 128024.290.30048.631.24-14.7

What can investors learn from this? We should look more globally for investment ideas. Practice value investing with a global view. US investors may even benefit from a weak dollar when in international companies.

While it is hard to predict the move of the move for exchange rates for foreign currencies, over long term, the countries with higher growth rate and disciplined government spending will result in strong currency. With an alarming level of national debt, reckless federal spending, accelerating national debt increase and grid-lock in Washington, we know US is not one of them.

If you live in the US, you may not feel the pain of the dollar decline, yet. But you should be aware of the situation and protect yourself for the long term.

How to do this?

When we asked this question to Tom Gayner, the outstanding CIO of Markel Corp. (MKL), during the last value investors' conference, he said he invested in US companies with large international operations. This is also the answer by long term value investor Arnold van den Berg, as he said in our interview with him.

Maybe that is also one of the reasons why Warren Buffett has been investing more in international stocks. He bought large stakes in foreign companies these years, including German reinsurer Munich Re, Swiss reinsurer Swiss Re, French Pharma giant Sanofi-Aventis (SNY), British retailer Tesco (TSCDF.PK), Korean steel company Posco (PKX) and Chinese carmaker BYD (BYDDY.PK). For details, go to international stocks in Berkshire Hathaway’s equity portfolio, or check out Warren Buffett’s international stocks. For more ideas on international stocks, please check out where to find value ideas for international stocks.

So this is the one way of doing it:

Invest in US Companies with Large International Operations

How does it work?

When you invest in US companies that draw large percentages of its revenues abroad, the total revenue and earnings will benefit from the weak dollar. Considering Coca-Cola (KO), this is the operating income contribution by operating segment on a percentage basis:

Year Ended December 31, 2010 2009 2008
Eurasia & Africa 11.6% 9.8% 9.9%
Europe 35.2 35.8 37.6
Latin America 28.5 24.8 24.8
North America 18.0 20.7 18.8
Pacific 24.2 22.9 22.0
Bottling Investments 2.7 2.2 3.1
Corporate (20.2) (16.2) (16.2)
Total 100.0% 100.0% 100.0%


This is what Coca-Cola said in their latest 10-K:

  • In 2010, foreign currency exchange rates favorably impacted consolidated operating income by approximately 3 percent. The favorable impact of changes in foreign currency exchange rates was primarily due to a weaker U.S. dollar compared to most foreign currencies…
  • In 2010, operating income was favorably impacted by fluctuations in foreign currency exchange rates by approximately 7 percent for Eurasia and Africa, 3 percent for Latin America, 8 percent for Pacific and 9 percent for Bottling Investments. Operating income was unfavorably impacted by fluctuations in foreign currency exchange rates by approximately 1 percent for Europe.


According to Coke, a weaker dollar has helped its earnings. For shareholders in the US, the company is earning more in dollar terms. The share price deserves to be higher if the earnings are higher.

Many US large cap companies are drawing large shares of their revenue and income from international operations. For instance, Johnson & Johnson (JNJ) had a total revenue of $61.6 billion in 2010. Out of the $61.6 billion, only $29.45 (48%) billion is from US operations.

Cigarette marker Philip Morris International (PM) is a spinoff from Altria (MO). The company draws all of its revenue from foreign operations. Out of the $67.7 billion revenue, $28 billion is from EU, $16 billion is from Eastern Europe, Middle East & Africa and $15 billion from Asia.

Walmart (WMT) has about 26% of its revenue from international operations, which are responsible for about 20% of the profit.

Therefore, US investors can protect themselves from dollar declines by investing in US companies that have large operations internationally.

Besides this, US investors can also invest in foreign companies that are traded in the US through ADRs. This is a smart investor Tom Russo’s favorite way of investing.

Invest in Foreign Companies That Are Traded in the US

You can also protect yourself from dollar declines by investing in foreign companies that are traded in the US. Many foreign companies that are traded in foreign exchanges are also traded in the US through ADRs. Investors can buy these shares just like they buy any US companies. The shares on the foreign exchanges and ADRs are usually exchangeable at the current currency exchange rates. Therefore a dollar decline will result in share price increases in US dollar even if the share prices in the foreign exchanges are unchanged.

When we asked Tom Russo why he likes foreign companies, he said:

“We have more than 70% of the fund in foreign companies. The reason is because we are long term investors, and we feel that foreign companies are usually family run, and they are long term minded. These companies usually have huge name recognition. They have the brands that have hundreds of years of history. This gives them huge competitive advantages. Their consumers are loyal to these brands.”

He said that his fund performance has benefited from the dollar decline by at least 2% a year over the past 26 years.

Let’s take a look at one of his largest holdings, Nestle. The food and beverage maker is traded in Swiss under the symbol of NESN. This is the price chart on Swiss exchange in Swiss France for the last 12 months.



Its ADR is traded under the symbol of NSRGY. This is the price of the ADR over the past 12 months.



Comparing those two charts, we can see that Nestle was down about 2% over the past 12 months on the Swiss exchange. But the ADR was up 28% in the past 12 months. The 30% difference in the performance of the same stock is caused by the devaluation of the US dollar against the Swiss Franc.

This is just an example how investing in foreign companies through ADR works. Similar examples can be found in many other companies from different countries. For an example, Toyota Motor Corp ADR (TM) is up 15% in the past 12 months. But in Tokyo exchange the stock is actually up only 2.55%. The difference is caused by the declining of the US dollar relative to the Japanese yen.

You are eligible for the same percentage yield of dividends through ADRs if the company pays dividends.

Predicting the short-term movements of currency exchange rates is as hard as predicting tomorrow’s stock prices. But over the long term, a country that grows faster and spends responsibly will see stronger currencies. Investing in US companies that have large operations internationally or investing in ADRs of foreign countries can help you to diversify your risk, protect you from dollar declines. Looking around, you may find a lot of foreign companies are quite worth investing.

Read Where to Find Value Ideas for International Stocks to find ideas for foreign countries. Or download our new GuruFolio report, where you will find a section for international stocks. For example, this is the link to Tom Russo’s GuruFolio report.

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User Comments

Sapporosteve
ReplySapporosteve - 1 year ago
Hi,

Is it possible to plot currencies against each other. For example, I have being buying US companies (AIG, C,BAC etc) in Australian dollars. Part of my reasoning is that the US dollar will strengthen and the Aussie will weaken. I saw somewhere where the currencies usually have a 3 years run and then revert to their men. In this case the AUS/US dollar is about 75 US cents.

So I buy with a strong Aussie and get value and then miss a bit on the dividends, but then is the AU dollar weakens which I expect at some point, then I will collect extra 10 maybe 20% from the exchange rate changes.

My question is is it possible for you to develop a graph so we can ploy currencies against each other so as to see how long the Aussie has been strong against the US dollar? That way we might be able to see if there is any reversion to the mean possible.

regards
Steve
Chentao1006
ReplyChentao1006 - 2 years ago
No one?
Chentao1006
ReplyChentao1006 - 2 years ago
Is there anyone buying Chinese stocks?
Gurufocus
ReplyGurufocus - 3 years ago
test


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