BERLIN – For Americans planning a vacation abroad, the weak dollar may be a good reason to rethink their plans and travel closer to home. For investors, however, the weakening U.S. dollar is a call to action. Although the earnings of many companies around the world take a hit when the dollar drops, that tendency is by no means universal. For instance, U.S. companies that export abroad generally do better, because their products are less expensive to foreign buyers. Likewise, foreign importers can buy American goods with their stronger currencies and reap the cost savings.
For investors, the key is to determine which investments actually benefit from a wilting dollar. Richard Bernstein, Chief Investment Strategist for Merrill Lynch, expects three categories to outperform during this prolonged period of weakness in the dollar: large-cap U.S. growth stocks, dividend-paying foreign shares and gold stocks.
1. Buy large-cap stocks to reap returns from abroad.
On average these companies earn fully one-third of their sales abroad, while the businesses behind value stocks average 23 percent from exports. Because of their overseas exposure, large-cap growth companies in the exporting category may see the greatest returns. These firms benefit from favorable exchange rates on payments from foreign customers. What’s more, these global suppliers typically have solid exporting infrastructures poised to grow as the dollar slides. As they expand, U.S. goods become less expensive and more attractive in foreign markets.
2. Make the dollar work for you with foreign stocks.
Another potentially fruitful strategy during a U.S. dollar slump is to invest in dividend-paying non-U.S. stocks, according to Bernstein. In this case, investors benefit directly from global exchange-rate variations when cashing in their foreign-currency dividend checks. The November RIC Report lists 20 stocks with a Standard & Poor’s rating of Grade A- or higher for stability and growth in earnings and dividends; these stocks also offer dividend yields of 1.9% or more.
Persimmon, one of Britain’s largest house-building companies, tops this list. It’s earned an A+ rating from S&P and produces an attractive 4.4% dividend. Because the dollar lost more than 10% against the pound over the past year, U.S. investors who owned Persimmon shares effectively took in a 5% dividend yield—among the highest for corporations globally, and comparable to that of a certificate of deposit (CD).
3. Use gold to hedge the greenback
Buying into gold stocks, funds and exchange-traded funds (ETFs) can be an effective weak-dollar leveraging strategy. Gold prices have a negative correlation with the dollar, Bernstein notes. Since 2001, the spot price of gold has risen to around $750 an ounce from less than $300, while the dollar has fallen sharply over the same period.
Gold producers see strategic acquisitions as “key planks for future growth,” says Michael Jalonen, the gold and precious metals analyst for Merrill Lynch. However, Bernstein does not recommend that investors take a large position in gold, because gold is a commodity—a rare one at that—and subject to speculation. “We continue to think that a small allocation to gold and gold shares is appropriate,” he says.
Each one of these investment strategies bears risk, especially if the value of the dollar rises. But Bernstein says the U.S. government has shown little interest in helping to revive its currency.
“Much of the world increasingly views dollar assets as unattractive,” he adds. That may not be good news for the greenback, but the dollar’s losses could be investors’ gain — with the right strategy.
(The writer is a Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-9084.)