Consider the example of McDonald’s, which generates 65% of its income outside the US. Without protections against currency fluctuations, if the dollar is weak, every burger McDonald’s sells in euros generates more profit. On the flip side, if the dollar strengthens, each burger sold in euros would be worth less in dollars and the chain’s revenue — and earnings — would take a hit. In a recent corporate filing, McDonald’s said it expects its diluted earnings per share to move $0.25 if four of the five currencies from the US, United Kingdom, Australia, Eurozone or Canada move by 10% in the same direction.
If the earnings per share decreased, this would likely cause a decline in share price, hurting investors who own either the individual stock or a mutual fund that counts McDonald’s shares among its holdings.
A company like Apple, the maker of iPads and iPhones, exposes investors to currency fluctuation risks on two levels. The company does business overseas as well as produces products overseas. The real risk would be that the currency collapses in an area of the world where Apple and other firms like Google, Microsoft, Yum! Brands, Exxon Mobil and General Electric have substantial operations. Shares of these companies make up portions of many popular mutual funds and can sway stock indexes.
If there’s a gradual rise in interest rates, such a company would be able to readjust its business to lessen the impact, said Sarenski. If there’s a sudden rise in interest rates and the currency collapses because of inflation — a less likely scenario — any longer term hedge for such scenarios would likely not help and overseas sales would be severely devalued.
“People don’t think about the added level of risk from buying stock in a multinational corporation— there’s currency risk in each one of those,” said Sarenski. Indeed, companies comprising the Standard & Poor’s 500 index received 34% of their revenue from foreign sales in 2012, according to a Goldman Sachs report.
“As the US dollar goes down in value, there’s an effect to the value of those investments” in US multinationals, Sarenski said.
Investors can protect their portfolio against the stock market as a whole, and to some extent the currency risk inherent in owning shares in a multinational company, by diversifying into commodities and precious metals that traditionally move opposite the market, said Sarenski.
