Thomas Lyons 
Exporters in Europe are starting to feel the effects of regional exchange rate strength against the dollar despite Europe’s forecast-beating company earnings. The euro, Swiss franc and sterling are expected to rise further against the US currency, potentially causing trouble for the Stoxx 600 equity index which relies on North America for almost a third of its sales. Although the effect is not yet fully apparent, it is clear that companies such as Bayer and Roche are feeling the pain. This could have a broader impact in the coming months if support fades from China’s post-Covid reopening, Europe’s hitherto resilient growth slows and the US tips into recession.
Senior European equity strategist at Goldman Sachs Group, Sharon Bell, has said that economic strength has disguised the impact of currency appreciation, but it will be coming through and more impact is expected in the second and third quarter. Bell says that a 10% rise in the euro shaves 2% to 3% off earnings-per-share growth for European companies. This impact will be increasingly hard to avoid, she reckons, especially as the bottoming of exchange rates last September sets a steep bar for year-over-year comparisons. Bloomberg Intelligence sees the euro touching $1.20 against the dollar by year-end, while sterling and the Swiss franc are also expected to strengthen versus the greenback.
According to analysis by Bloomberg, Europe’s telecommunications, health care, media, and consumer staples companies receive the greatest proportion of their revenue from North America. For such businesses, strong currencies are a double-edged sword. They help dampen imported inflation, crucial at a time when companies are reeling from high input costs. But they can make goods more expensive for buyers in other countries and mean overseas earnings are worth less when translated into the local currency. Germany’s Bayer, for instance, warned of a €1.7bn exchange-rate hit in 2023, with full-year sales potentially coming in at the bottom of a previously forecast range. Chief executive officer Werner Baumann reassured analysts that hedging efforts have been ramped up to protect the bottom line.
Switzerland’s Roche, which relies on the US market for half its revenue, chief financial officer Alan Hippe said first-quarter sales had fallen 3% in constant exchange-rate terms. But taking into account currency moves, the decline amounted to 7%. Dutch retailer Koninklijke Ahold Delhaize is another example, with 60% of revenue coming from North America. Chief financial officer Natalie Knight does not expect full-year EPS to grow from 2022, citing moves in the US dollar as a reason.
Despite European boardrooms brooding about the impact, dollar-based American investors are revelling in the extra windfall they can earn from the exchange-rate translation. Vanguard’s FTSE Europe ETF, the largest unhedged US-based fund geared to European shares, has received over $19bn this year as investors buy into the region’s stocks. Alessio de Longis, a New-York based fund manager at Invesco, said that “currency strength has been a big building block for our neutral to bullish view on European equities, relative to the US”.
In Europe, some money managers are adjusting their positions to account for currency shifts. Alexandra Jackson, manager of the Rathbone UK Opportunities Fund, prefers the domestically oriented FTSE 250 index to the internationally exposed FTSE 100.
