Analysts expect sobering impact on earnings due to strong dollar

The Outlook

April 21, 1996|By Jay Hancock

It's hard to remember, but not long ago you could buy more than 200 Japanese yen with a greenback. Last week a dollar bought fewer than 110 yen.

But financial analysts aren't rejoicing about the decline and how it has beefed up corporate earnings and boosted U.S. exports by making them cheaper overseas. No, last week they were complaining because the dollar has risen against the yen from a low of 81 cents last year to a recent high of nearly $1.09.

The dollar has gained against other key currencies, too, especially the German deutsche mark. Last week you could buy 1.51 marks with a dollar; up from a low of 1.35 last year.

Because a stronger dollar reduces the international profits of U.S. corporations, some on Wall Street worry about Procter & Gamble, Black & Decker and other companies with big overseas operations. Rising earnings account for much of the upward propulsion of the stock market in recent years. Are earnings at risk now? Will a stronger dollar hurt U.S. exports? And how will interest rates be affected?

Robert Sweet

Chief economist, financial management unit, First National Bank of Maryland.

The biggest effect of a stronger dollar is going to be on the equity markets. It'll be a two-pronged effect. First, it's going to hurt the transnational earnings of any U.S. company that has substantial sales overseas -- the IBMs, the Coca-Colas, the Gillettes. Because they're translating much of their earnings back into U.S. dollars, they're going to show lower earnings growth.

When they had good earnings last year from overseas, a lot of it came from the weaker dollar. I do feel confident that these companies will be reporting lower-than expected earnings, and these consumer-goods companies with major overseas business make up a large part of the Dow.

The other prong involves exporters. But I'm not so concerned about the higher dollar hurting exporters yet. From my studies, it looks like a ratio of maybe 125 yen to the dollar would really begin to hurt, say, Caterpillar against Komatsu.

I think the dollar is going to go to 110 yen now and it could go to 115 or 120. And I think it'll go up to 1.55 Deutsche marks. But I'm not too concerned about exports.

Lucinda Mezey

Chief investment officer, Alex. Brown Capital Advisory and Trust.

The issue of the dollar will have an impact on multinational corporate earnings. It's the antithesis of what we went through last year, when a falling dollar was a benefit to corporate earnings.

For those companies that have meaningful exposure abroad, it will have a dampening effect on the earnings that they report here.

But most analysts are aware that the dollar is rising, and most of them are adjusting their earnings expectations to reflect that. So it's unlikely that the market's going to react very negatively to earnings shortfalls owing to the dollar. I think a lot of that's already known.

The second thing, which is less talked about, is that a rising dollar means that U.S. goods are less competitive worldwide. A low dollar has made our exports very attractive to the rest of the world.

Now the dollar's going the opposite way for us. We may find we have a negative trend in export sales, which would have a negative effect on the U.S. economy and, ultimately, corporate earnings.

But one thing we have to recognize is that the dollar goes up and goes down, just like anything else. Over long periods of time it tends to remain relatively stable.

While you have quarterly hiccups from time to time, it shouldn't dissuade you from the specific reason that you own a security.

David Orr

Chief economist, First Union Corp.

In terms of interest rates, a stronger dollar has a positive effect because it tends to lower the overall inflation rate by restraining the prices of imports.

The larger question is: Will the dollar keep rising? My hunch is, yes during 1996, but not over the long term. In 1996, the Germans have made it very clear that they want the Deutsche mark to be weaker in order to stimulate their exports. So that rate is now 1.5 Deutsche marks to the dollar. I think the low last summer was on the order of 1.35. We think 1.6 or more will happen, because they want it to.

Predicting the dollar's performance against the Japanese yen is more problematic. The yen is at a level now where the Japanese exporters are not in trouble any more. Whereas last summer, when the yen was in the low 80s, Japanese exporters were about to suffocate.

Between July and February, the Japanese bought dollars week after week on a scale that's virtually never been seen.

They're not going to keep on doing that. The long-term outlook for the dollar -- over the next five or 10 years -- is still lousy, so long as we do not save enough money domestically to pay for our own investment needs.

For U.S. exporters, as far as I can see right now, the rise of the dollar is not a significant problem. Even at 1.6 marks and 110 yen American products are still very, very competitive.

Pub Date: 4/21/96

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