Before Covid-19, the world economy was in the direction of continued globalization. The mobility, travel and trade between dozens of countries have facilitated global interconnectedness. Unfortunately, the pandemic has placed an unprecedented burden on the globalization process. Despite this, we highly believe that sooner or later, due to its massive success in fuelling economic growth, globalization will resume its course!
Consequently, it will continue to impact your investments. Given that, do you think a US-based company listed in the NASDAQ or NYSE has 100% US country risk? Or do you take a different approach? Maybe look at the revenues? That’s precisely what we will address in this article! Follow us!
Revenues: The metric to look for
As stated in the S&P 500 (SPY) factsheet, the following are the top 10 holdings as of October 2024:
Looking at the top holdings of the S&P 500 in 2024, it’s interesting to see how Apple’s revenue distribution remains heavily international, with only approximately 36% coming from the United States.
In other words, we can easily observe that an investor allocating capital in an ETF replicating the S&P 500 will be much less exposed to the United States than they might intuitively believe!
Since companies like Apple, which make up a significant portion of the S&P 500, generate a substantial part of their revenues from international markets, investing in the S&P 500 provides more global diversification than one might expect.
An analysis of the revenue sources within the S&P 500 gives a clearer picture of your real geographic exposure.
Real-life examples
Philip Morris
Besides, as listed in the US, the trading currency is the USD. As a European investor, do you think that your risk exposure is the US Dollar? We know it does not sound clear at first, but you have no USD risk since you have no revenues from the US and, in theory, revenues translation should offset currency movement in the long run.
Looking just to 2023, you will notice that Philip Morris had a translation loss of $1,112 (3.16% of 2023 revenues). It means an appreciation of the USD against the average currencies in which Philip Morris sells its products. In theory, you would see an adverse stock price reaction due to the lower USD revenues.
Nestlé
So, a European investor would see the stock decline but a gain in the foreign currency exposure (from USD to EUR).
Another example comes from Nestlé, Swiss multinational food and drink processing conglomerate corporation. It is listed on the Swiss Stock Exchange (SIX), and so, it is quoted in Swiss francs (CHF). Still, only less than 1% of the companies revenues come from Switzerland. Are you exposed to Switzerland or CHF? We do not think so!
In the summary of the 2023 Annual Report, you will find the following: “ The impact on sales from foreign exchange was negative at 7.8%, following significant and broad-based appreciation of the Swiss franc”. This reduction negatively impacted the stock market price. But, it will be offset (in theory, in total) by the appreciation of the CHF, which will give you more EUR (remember you own Nestlé shares quoted in CHF).
Bottom line
All in all, assessing the company’s country revenues (and, consequently, currency exposure) will help you better understand the actual risks of the business. Incorporating all these factors should be taken into account in the decision-making process and thus contribute to a proper level of diversification.
This is just one of the many things to look for in any due diligence process! Our idea was to discourage you from thinking of not investing in a company listed in a stock exchange where you would supposedly have too much exposure. It would help if you always took a second level of thought when addressing your real risk exposure!
A reminder that the above should not be construed as investment advice and should be considered information only. Investors should do their own research and due diligence about the services and opportunities best suited for their risk, returns, and impact strategy.
If you need further guidance or have questions, feel free to reach out to us. Happy investments!