Johnson & Johnson (JNJ) & The Coca-Cola Company (KO): Currency Headwinds Won’t Stop These Stalwarts

Page 1 of 2

Part of the difficulty with analyzing equities is assessing the international strength of the economy. A strengthening dollar and falling emerging market GDP growth will have a negative impact on multinational companies.

Global economic backdrop

Source: Ycharts

The iShares FTSE China ETF declined 22.61% year-to-date, iShares MSCI Brazil Capped ETF fell by 14.04% year-to-date, and the iShares MSCI Spain Capped Index Fund depreciated by 5.78% year-to-date.

Brazil is being hit by high rates of inflation with low rates of economic growth. Typical monetary easing tools cannot be used in Brazil; monetary easing would only increase the rate of inflation. This is why Brazilian stock values are falling, and the Brazilian central bank isn’t out purchasing assets due to inflationary risk.

China is facing its own sets of issues. The economy is transitioning into a service based economy. As a result, China is focusing less of its attention on exports. Processing trade inflates the total economic output without having any real impact on the economy. Reducing exports and focusing on consumption will cause falling rates of GDP. The Chinese economy may get a boost if the People’s Bank of China were to initiate accommodative monetary policy. Many outward looking forecasts assume a drop in GDP in 2013, with a recovery in 2014. Hopefully the Chinese government initiates monetary easing and offsets the decline in GDP.

Spain is in the middle of the pack. Austerity measures have pushed Europe into a double dip recession. It’s very likely that accommodative monetary policy (asset purchases and low interest rates) will persist for the rest of the decade. Fiscal stimulus is almost a no-brainer at this point, but Germany’s fear of hyper-inflation has made it difficult for the European economic block to initiate fiscal stimulus policies.

Buy U.S. equities

In the face of global uncertainty investors have invested heavily into U.S. equities. The greatest advantage of owning U.S. equities is the international exposure multinational companies have. It’s an indirect play on the global economy, and the stable growth in the United States GDP helps to keep a floor underneath U.S. equities.

Based on the economic challenges that Europe, China, and Brazil are currently facing, it can be assumed that a diversified play like owning the SPDR S&P 500 (NYSEMKT: SPY) could be the most lucrative choice for investors who want a reasonable mix of return and risk. The SPDR S&P 500 has a distribution yield of 2.08% and has a market capitalization of 149.3 billion. An overwhelming number of investors have opted to own U.S. equity index funds as a practical hedge against global economic uncertainty.

The currency backdrop

The recent bond market sell-off triggered a rally in the value of the dollar. The dollar for a moment at least, was considered the hedge against both bond and stock market volatility. However, the bond market has not been able to recoup all of its losses while the major stock indices like the Dow Jones Industrial Average and Standard & Poor 500 have been able to recoup losses. The trend clearly indicates that stocks are the way to go.

Source: Ycharts

The dollar index has appreciated by 3.35% year-to-date. The eventual tapering of quantitative easing will cause the dollar to appreciate. The assumption is that because other currencies will be undergoing accommodative policies (Europe and China) the value of the dollar should be able to appreciate against a basket of currencies. Because of this I believe that currency related losses will persist for both The Coca-Cola Company (NYSE:KO) and Johnson & Johnson (NYSE:JNJ).

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!