The dollar may be depressed but it's having a rosy effect on large-capitalization U.S. stocks.
Because larger companies tend to have greater exposure to foreign operations than smaller companies, they have participated more fully in the Dow Jones industrial average's surge above 4000. U.S. exporters have a double benefit from the weak dollar: Not only does it make American goods cheaper abroad, but it also boosts earnings when income is translated into U.S. dollars from the local currency.
"You can say (the weak dollar's) a positive for large-cap growth stocks. It's almost impossible to find a large American company without foreign operations," said Stephen Boyd, senior vice president and portfolio manager in the Houston office of Van Kampen American Capital, which is based in Oakbrook Terrace, Ill. He runs $4.3 billion in the American Capital Pace Fund and the Common Sense Trust Growth Fund.
And the indexes bear out that optimism. The Wilshire Top 750 Universe, which covers the largest 750 stocks of the Wilshire 5000 index, returned 7.27% for the year to date through March 10. By contrast, the Wilshire Next 1750 Universe, a small-cap index, rose only 3.52% and the Wilshire Mid-Cap 750, 5.65%.
Large-cap value managers also are upbeat. "The dollar's overblown. It's probably unjustified being down here. The U.S. is the most politically stable market in the world. There's not a lot of inflation and economic growth is pretty stable," said Philip Schettewi, managing partner of Loomis Sayles & Co. L.P., Washington, who runs $1.5 billion in large-cap value equities.
Mr. Schettewi said many investors have lumped the United States into a "North America" category with Mexico, whose currency has been decimated. What's more, the fact the balanced budget amendment didn't pass in the Senate probably is viewed as a sign of "fiscal irresponsibility on the part of the U.S.," Mr. Schettewi said.
For large caps, the weak dollar's effect is broad, benefiting household names like Colgate-Palmolive Co. and The Procter & Gamble Co. as well as companies in technology and basic industries.
"I think the dollar's down 3% to 4% over the past week (ended March 11). If 50% of sales are international and in one week the dollar's down 3%, that will add 15% to revenue growth just from currency," assuming the company doesn't hedge, said Patrick Adams, portfolio manager of the $320 million Founders Blue Chip fund and the $100 million Founders Balanced fund, Denver.
Added John Laupheimer, senior vice president and portfolio manager of the $1.7 billion Massachusetts Investors Trust of Massachusetts Financial Services, Boston: "About a year ago we made a major shift to bigger consumer non-durable names because we thought the U.S. economy would weaken as a result of the Fed. And these companies - with very stable businesses - were poised for a comeback. Those companies just happen to have fairly substantial overseas operations. We were not so much smart as lucky."
The fund's largest holding is Philip Morris Cos. Inc. It also holds General Electric Co. and Gillette Co.
Similarly, Charles Mayer, senior vice president of the $3.8 billion INVESCO Industrial Income Fund, Denver, said his portfolio companies, on average, derive 40% of their earnings abroad. Holdings include The Boeing Co., E.I. du Pont de Nemours & Co. Inc., Hewlett-Packard Co., IBM Corp., Honeywell Inc. and Walt Disney Co.
"There is a renaissance in the U.S. manufacturing sector. The U.S. is now the low-cost producer. It is more competitive due to technology and from the dollar standpoint," Mr. Mayer said.
Of course, managers' optimism is tempered by the nagging possibility that the Fed could tighten rates again to hoist the dollar. The latest indication is that won't happen.
In the past when the dollar has weakened, the Fed has not reacted, Mr. Mayer said. "A slowdown globally because of the Mexico crisis will temper the inflationary fears people have. .*.*. The Mexico crisis has given the Fed leeway to be a little less reactive," he said.
Some portfolio managers warn against painting large caps with a broad brush. "You have to be careful. Some of the consumer non-durables have exposure to areas under severe (currency) pressure such as Mexico," said Van Kampen American Capital's Mr. Boyd. He cited Avon Products Inc., which has seen its earnings estimates downgraded by some analysts.
And Mr. Boyd has cut in half his American depository receipt holdings of European-based industrial companies that might be hurt by the weak dollar, such as Philips NV, Akzo Noble NV and Daimler-Benz AG.
Howard Ward is senior vice president of GAMCO Investors, Rye, N.Y., and portfolio manager of the $475 million Gabelli Growth Fund. He said on a short-term basis the weak dollar does heighten the relative attractiveness of U.S. exporters, but large-cap companies have been benefiting from the currency for 10 years.
"We may be close to an inflection point for the dollar. It has received so much attention and so many speculators are betting against it, selling short to buy deutsche marks and yen .*.*. maybe the question going forward should be how would (a company) benefit from a rising dollar?"
While Gabelli Growth is widely invested in multinational growth companies, "if the dollar strengthens, you want to have a significant exposure to financial issues which have been penalized more than other companies" by the weak dollar. Such companies would benefit from stronger bond markets.
"We have positioned the portfolio to capitalize on a stronger dollar several months out," Mr. Ward said. The fund has 13% in financials such as Mellon Bank Corp., American Express Co. and American International Group Inc. vs. the S&P 500's 10% weighting in financials.
Mr. Schettewi, who manages only stocks, thinks 1995 will be a good year for equities as well as bonds, which stand to gain after last year's abysmal performance. The Fed's tightening of monetary policy last year "probably extends the economic cycle by two years and sets a much better tone for the equity market. Lean, mean domestic companies are probably operating a lot more effectively." Plus, it's a pre-election year, which statistically is good for stocks.
"The wall of worry with the dollar is a positive. As worries dissipate, you drive (stock) prices higher," Mr. Schettewi said.
A value manager, Mr. Schettewi has added to auto holdings like Chrysler Corp. He also likes steel companies such as Inland Steel Industries and LTV Corp.; and just bought Westinghouse Electric Corp., an out-of-favor conglomerate he believes is "doing the right things."
"The market hit 4000 led by technology and health-care stocks. A lot of other names have not participated," he said.
Harbor Capital Management Co. Inc., Boston, which until recently favored small cap stocks, expressed a change of heart in a recent report that "whatever the economic outcome, we believe larger companies will have a performance advantage over their smaller brethren in 1995." It cited the currency effect, which will boost such large companies as Coca-Cola Co., which derives 80% of its profits internationally. Harbor also mentioned investors' flight to quality, which will boost blue chips as emerging markets languish and the economy is uncertain.
A year ago, half of Harbor's equities had market caps of more than $3 billion. Now, 70% have that capitalization. The S&P 500's large-cap weighting is 80%.
Founders' Mr. Adams agrees large caps are a safe haven in uncertain times.
"It's a very strange market. It's liquidity driven, which is a bearish sign. Yet stocks are going up. .*.*. The secure thing to do is buy big multinational U.S. companies which have less downside on a relative basis if the market corrects," he said.
"Clearly active managers are getting beat so far for the year. .*.*. People are buying large names for safety and liquidity. I believe this is more or less a temporary situation. There will either be a correction, or the market will go sideways," Mr. Adams said.