Foreign exchange will weigh decisively on 2015 corporate earnings
Ibra Wane is senior equity strategist within the strategy and economic research team at Amundi.
Stock market valuations are wound tight on both sides of the Atlantic, and the prospects for further increases in multiples are now limited, specifically in the United States where it looks as if monetary policy will slowly normalise.
So without significant rerating, growth in corporate earnings will be crucial.
Against this backdrop, the sharp rise of the dollar, which has appreciated 17% against a basket of currencies and 29% against the euro since June 30, has particular importance for both US and eurozone securities.
In addition, three other factors will also impact earnings: the economic situation, oil prices, and the state of banking sector normalisation.
To illustrate these different impacts, we have aggregated the interim balances of each of the components in the EuroStoxx 50 and the S&P 500, two indices that are emblematic of their respective regions and highly international as well, with a 36% and 45% share, respectively, of non-domestic sales (outside the monetary zone).
The average euro-to-dollar exchange rate should land at 1.05 in 2015 and 1.00 in 2016, after 1.33 in 2014, which is quite spectacular. To fully appreciate the impact of the exchange on the EuroStoxx 50 and the S&P 500, however, the approach must be extended to the other currencies.
With -12% in effective ex-change rate, versus -21% in dollars (1.05 vs. 1.33), euro depreciation compared to the basket of currencies is, admittedly, less spectacular than compared to the dollar, due to the concomitant decline in the yen and numerous emerging currencies, but for the first time since the crisis began, eurozone businesses will benefit from a competitive currency.
Indeed, you will recall that from September 2008 to end-2014, despite a double-dip recession against a single one in the US, the euro’s average exchange rate came out to $1.34. Conversely, US businesses will face a 12-year peak for the dollar against all currencies.