7 months ago • 1 min
European stocks have generally outperformed this year, propped up by three key pillars: the avoidance of a full-blown energy crisis, the relative stability of the bloc’s banking sector, and hopes that the end of China’s lockdown measures would result in booming sales for Europe’s luxury goods brands. While the first two have held up, the third is looking a little shaky, with recent Chinese data showing scant evidence of the big spending some had hoped for. And now, Europe's firms are contending with a new headache: a weaker dollar.
Since September, the euro, Swiss franc, and British pound have all appreciated by more than 10% versus the dollar, and several analysts say that’s probably just the start, as interest rates top out in the US but keep rising elsewhere. For businesses with overseas operations, a stronger currency at home is a double-edged sword. It helps lower the price of imports – and that’s crucial when companies are suffering from high input costs. But it also makes their products more expensive for overseas buyers, potentially lowering sales. What’s more, it diminishes the value of foreign earnings when converted into the firm’s home currency.
A weaker dollar could spell trouble for a key European stock index (the Stoxx 600), whose companies rely on North America for nearly a third of their sales. As a Goldman Sachs rule of thumb goes: a 10% rise in the euro shaves 2% to 3% off earnings-per-share growth for European firms. But some sectors will be hit harder (black bars), with Europe’s telecom, healthcare, media, and consumer staples names generating the biggest proportion of their revenue from North America.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
/3 • Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.