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Over the
last few quarters, a declining dollar and difficult economic
conditions in the U.S. has provided big benefits to companies
with large international exposure. Companies which generate a
large portion of their revenues from overseas have profited from
favorable exchange rates and strong economies abroad. Meanwhile,
companies who generate most of their revenues domestically have
felt the effects of the credit crunch and strong economic
headwinds that have hurt both their top and bottom lines.
However, we expect to see this trend reversing in the near
future.
Global
economies have generally lagged the U.S. economy by 12-18
months. So while the recession-like conditions in the U.S. began
late last summer, they are just now beginning to feel similar
effects in Europe. One of the trends that we have recognized in
the earnings conference calls this quarter is the
acknowledgement that weakness is starting to become apparent in
Europe. Maybe even more surprising is the admittance of a
slowdown even in the Asia-Pacific countries.
Economies
such as India and China that have been white-hot over the last
few years, may be seeing a return to more sustainable levels of
growth. And the major European economies (UK and France in
particular) appear to be headed to flat or even negative
economic growth in the coming months.
Further
confirming this trend was today’s report on European retail
sales that showed the biggest drop in at least 13 years as sales
fell 3.1% in June. Escalating oil and food costs are having a
negative impact worldwide by leaving consumers with less money
to spend on other goods.
While many
have marginalized the impact that the U.S. now has on the world
economy, we continue to believe that as the U.S. goes, so goes
the world. A prolonged economic slowdown in the U.S. will have
global ramifications. However, we also believe that the economic
recovery will also begin in the U.S. before spreading to Europe
and rest of the world.
The
positive effect of this recovery will be felt first by companies
that generate much if not all of their revenues exclusively in
the U.S. This is in stark contrast to the past few quarters
where the companies that have outperformed Wall Street’s
expectations are those companies with significant revenues
coming from international sources.
So while
we don’t believe that we are at an inflection point yet, once we
do start to see some signs of a sustainable recovery, domestic
stocks may be the first to benefit. We would expect to see
companies like eHealth,
LoopNet and Internet Brands outperform companies that have
significant international revenues such as
Monster,
Amazon, and other
international stocks.
At the time this article was published, the author did not have
a financial position in any of the stocks mentioned in this
article.
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