Dollar Rescuing JPMorgan U.S. Stock View as Goldman Call Fizzlesby
Companies generating revenue outside U.S. attract investment
Signals investors more comfortable with global growth outlook
Two big firms, JPMorgan Chase & Co. and Goldman Sachs Group Inc., have two pretty divergent opinions about what you should own in the U.S. stock market right now. So far, the dollar is making the difference in who’s right.
Custom indexes maintained by both banks give the advantage to Dubravko Lakos-Bujas, the JPMorgan chief U.S. equity strategist who has been saying since December that companies that get most of their sales from abroad would do better than domestically oriented ones. Such multinational stocks are outperforming the broader market by almost 12 percentage points in the past three months.
Lakos-Bujas’s bull case foresaw just about everything that has gone right for the stocks: a weakening dollar, stabilization in China’s economy and a rebound in commodities. Bolstering all that is the Federal Reserve’s dovish stance, he said by phone. “We continue to like multinationals as their earnings likely will surprise to the upside over the coming quarters.”
A JPMorgan basket of 30 stocks in the Standard & Poor’s 500 Index that derive more than 50 percent of revenue outside the U.S. has risen 23 percent since Jan. 20. The group, which includes Johnson & Johnson, Coca-Cola Co. and Chevron Corp., is on track for its third straight months of gains, the longest streak since mid-2014.
On the flip side, Goldman’s chief U.S. equity strategist, David Kostin, reiterated as recently as April 4 a May 2015 recommendation to buy the bank’s domestic-themed basket, while selling its international counterpart. It’s a bet that proffered a nearly 50 percent five-year return but is now fizzling out.
“A growing economy, rising rates and a stronger U.S. dollar benefit domestic-facing stocks,” Kostin wrote last month, adding that Goldman’s “interest rate and FX forecasts suggest the outperformance will persist.”
The bank’s basket of 50 stocks in the S&P 500 most leveraged to domestic revenue has lagged behind its international counterpart by 8.6 percentage points since mid-January. A spokeswoman for the bank said Kostin wasn’t available to comment.
Much of the shift in sentiment is explained by currency. The Bloomberg Dollar Spot Index has tumbled 5.9 percent since Jan. 22 when it hit the strongest level in more than a decade.
“The stronger dollar has been a significant headwind for a lot of multinationals in the U.S. and by all appearances that headwind is becoming a marginal tailwind or at worst, perhaps more neutral toward their growth outlook,” said Brian Jacobsen, chief portfolio strategist with Wells Fargo Funds Management LLC, which oversees $242 billion.
That similar information fuels opposing positions illustrates how participants dissect the market, said Greg Woodard, a senior analyst and strategist at Fairport, New York-based Manning & Napier Inc., which oversees about $46 billion. “Different banks have different views of what factors are going to drive performance.”
Meanwhile, even more tepid forecasts for global growth still outpace estimates for the U.S. economy. The International Monetary Fund on Tuesday cut its outlook for 2016 global growth to 3.2 percent from 3.4 percent in January, while trimming its forecast for the U.S. economy to 2.4 percent from 2.6 percent. The World Bank followed on Friday with a similar revision.
Amid signs the global economy isn’t on the brink of recession, it’s made some investors comfortable with coming back to stocks -- like multinationals -- that got beat up as these concerns escalated. “The increased appetite for some of these bigger firms is reflecting lowered risks for recession,” Jacobsen said. For him, that’s meant a slightly different strategy -- investing in competitors of these companies that are domiciled in developed markets.
For Woodard, global diversification is another way to evaluate opportunities in a market that can split up many different ways -- by quality, value, revenue streams -- to make bets consistent with the rest of his portfolio. “We think of this as an additional tool you look at, but it’s not the only tool in the toolbox.”