Multinationals’ Currency Woes: A Harbinger on Global Growth?
The U.S. dollar has risen 7% against a basket of other currencies over the past year. That was a substantial headwind for three major consumer companies that reported earnings in the past week. Currency movements reduced fourth-quarter revenue by 4% at both Procter & Gamble PG -0.74% and Kimberly-Clark, and by 5% at Colgate-Palmolive . CL -0.58%
All of them highlight organic sales growth, which strips out currency movements and merger impacts, but actual profits aren’t immune to exchange rates. Colgate-Palmolive said Friday that it expects earnings per share to decline in 2019, due in part to stepped up advertising spending, but also currency impacts. The outlooks given by Kimberly-Clark and Procter & Gamble were similarly tepid.
Currency movements are difficult to interpret or predict. Even so, investors should consider what is driving the dollar’s strength. True, expectations for further Federal Reserve tightening are diminishing. That should be negative for the greenback, but it is being overwhelmed by concerns over the growth outlook in markets outside the U.S.
Those concerns have intensified recently. On Thursday, European Central Bank President Mario Draghiopened the door to fresh stimulus measures after warning that downside risks to the eurozone economy are increasing. A few days earlier, China reported is slowest annual gross domestic product growth since 1990.
Colgate-Palmolive is particularly exposed, with 78% of its sales coming from outside of North America. Other highly global consumer companies still to report quarterly earnings include Mondelez , PepsiCo PEP -0.14% and Coca-Cola . KO -0.67% If the global economy keeps slowing, even stripping out currencies won’t be enough to flatter their results.