Global Growth Boosts US Blue Chips
08/01/2007 12:00 am EST
Alec Young, Standard & Poor's international equity strategist, says US multinationals are getting more of their revenue from overseas, but thinks owning international stocks still makes sense.
Thanks to increasing globalization, roughly 44% of the Standard & Poor's 500's 2006 revenues came from international sources. This compares with only 32% in 2001.
Despite the housing-driven slowdown in the United States, overall global growth is surprisingly robust, as European and Asian economic momentum continues unabated.
According to data from the International Monetary Fund, the United States represented only 12% of 2006 global gross domestic product growth-highlighting the importance of global revenue diversification for US multinationals.
As S&P 500 sales become increasingly diversified internationally, US companies are better able to capitalize on overseas strength. At the same time, they can minimize the negative impact of the downturn in new housing demand at home.
We saw this dynamic at work in the first quarter. The S&P 500's earnings growth of 8% significantly exceeded the 3% analysts expected heading into the earnings season. For the second quarter, S&P analysts expect earnings growth of 5.7%, dropping to 2.4% in the third quarter.
S&P believes rising foreign sales exposure, amid continued international economic momentum and a weakening US dollar, will continue to act as a support to earnings. Even so, we do believe the S&P 500's increased international sales are a substitute for international equity portfolio diversification, for three reasons.
First, foreign companies are valued based on local political, economic, and regulatory conditions that do not impact the valuations of US multinationals to nearly the same degree.
Second, we think currency diversification represents a major reason for owning foreign stocks. Many US multinationals dilute this opportunity for diversification by hedging the currency risk associated with their overseas revenue, undermining their ability to leverage a weakening greenback.
Third, we believe foreign companies tend to reinvest locally for growth, thereby boosting their long-term prospects, whereas US multinationals repatriate much of their overseas revenue to fund domestic share buybacks and dividends.
After spending a record $431.8 billion on buybacks last year, S&P 500 companies spent an additional $117.7 billion on buybacks in the first quarter, putting 2007 on a pace for another record. Similarly, S&P 500 companies spent $58.3 billion on first-quarter dividend payouts. This means 2007 could eclipse the 2006 dividend record of $224.25 billion.
S&P Equity Research maintains its 65% equity allocation, divided between 40% US stocks and 25% foreign issues. Our US allocation includes 34% in large caps, 4% in mid caps, and 2% in small caps (IJR). The international allocation includes a 17% weighting in developed overseas markets like Europe, Australia, and Hong Kong; a 5% emerging market weighting, which includes China, India, South Korea, Taiwan, Latin America, Eastern Europe, Africa, and the Middle East; and a 3% allocation to Japan, reflecting its low 0.28 correlation to the S&P 500.