Companies are rethinking their hedging strategies in light of the strong US dollar, which is undermining the value of foreign earnings.
The WSJ Dollar Index, which measures the performance of the US currency against 16 others, is up more than 12% from this time last year and more than 8% from the start of the year. This is causing problems for S&P 500 companies, as many of them generate a portion of their revenue — on average about 30% — overseas and consolidate it in the United States.
The dollar has risen significantly against other currencies in recent months as weaker global economic growth drives investors to safe havens. The Federal Reserve’s actions to tighten monetary policy and raise interest rates also help the dollar.
According to FactSet, companies in the S&P 500 reported a total of $7.42 billion more in foreign-exchange effects in the first quarter of the year compared to the prior-year period, and a total of $12.57 billion less in gains from hedges and derivatives. Analysts anticipate similar effects in the second quarter.
Mentions of foreign-exchange effects in earnings calls of S&P 500 companies have increased in recent weeks, to 220 from the start of the year through June 20, up from 183 in the prior-year period, according to data provider S&P Global Market Intelligence. S&P found similar patterns for keywords like hedging and currency headwinds.
“The strength of the US dollar reduces the value of foreign earnings,” said Anthony Carfang, managing director of Carfang Group LLC, a treasury services provider. “Companies must increase their overseas revenues just to break even,” he said, referring to 2021.
Microsoft cut its earnings and revenue guidance for the fiscal quarter ending June 30, citing unfavourable currency movements.
Salesforce, a San Francisco-based software company, anticipates a $600 million foreign-exchange headwind for the fiscal year ending in January, up $300 million from an earlier forecast.
Medtronic PLC, a medical-technology company, said foreign-exchange rates have become larger headwinds for its business, forecasting a $1 billion to $1.1 billion drop in full-year revenue if current rates hold.
According to advisers, companies now have more tools at their disposal to hedge foreign-currency risks, with automated technology allowing for better, more timely insights into exposure. Businesses are also examining when and how they convert revenue from overseas and attempting to match local income with local spending in order to create buffers.
Coca-Cola saw a roughly $200 million negative impact on its first-quarter operating income, which came in at $3.4 billion, up 25% from the previous year. The company has approximately $7.6 billion in notional foreign-exchange cash-flow hedges.
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