subject: The Us Stock Market Is On This Website [print this page] Declining dollar gives overseas investors opportunity to buy US stocks at bargain rates, write Michael Tsang and Adria Cimino.Investors outside the US are purchasing companies in the Standard & Poor's 500 Index at the cheapest valuations on record, their buying power boosted by a seven-month decline in the dollar. The S&P 500 is priced at 19.9 times earnings, the biggest discount to the MSCI World Index of 23 developed countries since May 2003, according to monthly data compiled by Bloomberg. For Europe-based money managers, currency translations push the average cost for a dollar of US profits down to 13.60, the lowest level ever relative to global equities and a discount that investors in America have never enjoyed. Overseas investors that hold almost $2.5trn in US equities are getting a bigger slice of corporate America with each euro, yen and pound they spend just as S&P 500 companies from PepsiCo to General Electric post higher overseas sales. While more losses in the dollar would cut returns, the last time US stocks were this inexpensive, in 2003, the S&P 500 began a four-year, 62% advance. "What you're getting is the opportunity to buy global companies that have become cheaper because of the dollar and more competitive," said Antony Gifford, a London-based analyst. "If you can buy global secular growth at a discount because it's dollar-listed, then why wouldn't you?" The S&P 500 climbed 4.5% to 1,071.49 last week, the biggest gain since July. US service industries grew in September after 11 months of contraction while Alcoa, the largest US aluminum producer, reported an unexpected third-quarter profit as the New York-based company cut jobs and raw-material costs faster than analysts projected. The S&P 500 added 0.4% to 1,076.19 last week in New York, its highest close since October 2008. The MSCI World gained 0.5%, while Europe's Dow Jones Stocks 600 Index rose 0.7% as Philips Electronics reported an unexpected third-quarter profit. The dollar fell 11% against the euro and yen and 7.4% versus the pound in the past six months. The currency was driven down as the US government and Federal Reserve lent, spent or guaranteed $11.6trn and the central bank kept interest rates at near zero to combat the worst recession since the 1930s. The US Dollar Index traded as low as 75.767 last weeks, 6.7% above its record low of 70.698 in March 2008. Profits for US companies have dropped less than those in the MSCI World Index, helping increase the valuation gap with the S&P 500. Santa Clara, Intel, Goldman Sachs, GE and 28 other S&P 500 companies are scheduled to report results this week. The MSCI World has surged 66% since 9 March as its companies reported an average 40% decline in second-quarter earnings. The S&P 500 rose seven percentage points less even as its companies posted a profit decline that was 11 points smaller. The MSCI World was valued at 27.7 times the earnings of its 1,659 companies in September, exceeding the S&P 500's ratio by 7.75 points. That's the cheapest level for the benchmark gauge for US stocks since May 2003, when the index was beginning to recover from a two-and-a-half-year bear market that cut its value by 49%. Foreign investors owned $2.47trn in US common equity as of 30 June 2008, according to data from the US Treasury Department. That's equal to about 16% of the total value of the American stock market. Net foreign purchases of US shares rose to $28.6bn in July from $19.1bn the previous month. Overall, international demand for long-term US financial assets weakened in July as investors cut purchases of bonds. Officials in emerging economies such as China and Russia have questioned the dollar's dominance in the global economy as the federal budget deficit reached $1.4trn in the year ended 30 September. For overseas investors buying stock with currencies that appreciated versus the dollar, shares of S&P 500 companies may be an even bigger bargain relative to global equities. Adjusted for euros, earnings for S&P 500 companies are about 50% cheaper than those in the MSCI World. That makes US stocks less expensive now for money managers in Paris and Frankfurt than they were for American investors near the end of the bear market in 2002, when S&P 500 companies sold for a record 42% less than the average global ratio. Investors in the UK can buy a dollar of profit generated by S&P 500 companies for an average of 12.80, a 54% discount to the MSCI World, while annual per-share earnings of US companies cost 1,820 yen, 34% less than the MSCI World. Using the weighted exchange rates of the six currencies in the Dollar Index the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc the S&P 500 is currently valued at 14.7 times earnings. The S&P 500 last month traded at the biggest discount to the MSCI World on record, when adjusted for the six currencies. Converting US corporate profits into foreign currencies at today's rates would eliminate the discount in the S&P 500 created solely by exchange. Priced in dollars, the US index is 27% cheaper than the MSCI World, close to the biggest gap in six years. Adjusting the price of the S&P 500 for currencies in the Dollar Index is a way of gauging the relative cost of US earnings to overseas investors and predicting which country's stocks may rise or fall more, said Jack Ablin, chief investment officer of Harris Private Bank in Chicago. "The US stock market is on sale," said Ablin. "On a level playing field, the dollar is cheap to our trading partners' currencies, so they're able to get a reasonably priced S&P 500. It's an argument that makes sense." While the drop in the dollar may entice more international money managers and provide a boost to US profits, more weakening would erode the value of American stocks owned by overseas investors, offsetting gains in share prices. The S&P 500's 58% rebound from a 12-year low on 9 March shrinks by 22 percentage points when measured in euros and 15 percentage points in yen. Central banks are increasingly snubbing dollars in favour of euros and yen. Countries reporting currency breakdowns put 63% of the new cash into euros and yen in April, May and June. That's the highest percentage in any quarter with more than an $80bn increase. US equities less expensive the decline in the dollar makes it less expensive to buy US equities that's a fact," said analyst Walter Harecker. "But keep in mind that with the depreciation of the dollar, you'll have a loss on that. Then it's not a good effect." The profit growth forecast for S&P 500 companies by analysts for 2010 is 11 times faster than the expansion in US gross domestic product projected by economists surveyed this month. The average ratio is 6.1. "We're getting more and more cautious with the rally we've seen," Harecker said. "Valuations aren't cheap anymore, considering the health of the economy." A weaker local currency is also helping to boost profits at US companies, which are generating more of their revenue internationally. Last year, S&P 500 companies had 47.9% of their sales abroad, the highest level since at least 2003. The decline in the dollar makes American companies more competitive outside of the US because their exports become cheaper to sell, while the value of foreign-currency denominated sales increases in dollar terms. PepsiCo, the world's largest snack maker, reported a third-quarter profit last week that beat analysts' estimates, helped by an increase in international sales. Currency translation accounted for six percentage points of the 8% reported gain in PepsiCo's operating profit. A weaker dollar may also help bolster earnings at GE, which generated 53% of its revenue from abroad last year. The Connecticut-based company that makes everything from mammography equipment to jet engines and refrigerators was due to post results on Friday. "It's best to invest more in US stocks," said Louis de Fels, a Paris-based analyst. "They are benefiting from a weak dollar and that's not about to change. The more the dollar declines, the more exports will be strong."
