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
According to a Morningstar Research, in 2019, 62% of the revenues of the S&P 500 companies came from the United States, which means that roughly 40% of the revenues originates from international sources.
Looking in detail at the top 5 holdings of the S&P 500 in early 2020, you probably did not realize that Apple had such a low percentage of revenues coming from the US, only 37%.
The same pattern is repeated under other jurisdictions. In Japan, 59% of the Nikkei 400’s revenues are from Japan which is very close to the 62% within the S&P 500. Nonetheless, for the FTSE 100, in the UK, the domestic revenues are much lower: 22%. In France, this figure is 17% in the CAC 40, and in Germany’s DAX Index, this value is under 20%.
In other words, we can easily observe that a French investor allocating his/her capital in an ETF replicating the CAC 40 will be much less exposed to France as he/she might intuitively believe. So, by investing in CAC 40, you are much more diversified than you think! An analysis of the revenues will tell you what your real country exposure is.
Real-life examples | Philip Morris and Nestlé
Philip Morris, one of the world’s leading international tobacco companies, is headquartered in New York City and listed on the New York Stock Exchange. However, it has no revenues coming from the US, as you can see in the 2020 annual report:
Source: Philip Morris 2020 Annual Report
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 2020, you will notice that Philip Morris had a translation loss of $469 (only 1.63% of 2020 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.
Source: Philip Morris 2020 Annual Report
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 Swizterland or CHF? We do not think so!
In the summary of the 2020 Annual Report, you will find the following: “Foreign exchange reduced sales by 7.9% due to the continued appreciation of the Swiss franc against most currencies”. 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).
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.
Hope we helped, and leave your comments below.