Over the last few quarters, a declining dollar and difficult economic conditions in the U.S. has provided big benefits to companies with large international exposure. Companies which generate a large portion of their revenues from overseas have profited from favorable exchange rates and strong economies abroad.
Meanwhile, companies who generate most of their revenues domestically have felt the effects of the credit crunch and strong economic headwinds that have hurt both their top and bottom lines.
However, we expect to see this trend reversing in the near future. Global economies have generally lagged the U.S. economy by 12-18 months. So while the recession-like conditions in the U.S. began late last summer, they are just now beginning to feel similar effects in Europe.
One of the trends that we have recognized in the earnings conference calls this quarter is the acknowledgement that weakness is starting to become apparent in Europe. Maybe even more surprising is the admittance of a slowdown even in the Asia-Pacific countries. Economies such as India and China that have been white-hot over the last few years, may be seeing a return to more sustainable levels of growth. And the major European economies (UK and France in particular) appear to be headed to flat or even negative economic growth in the coming months.
Further confirming this trend was Friday’s report on European retail sales that showed the biggest drop in at least 13 years as sales fell 3.1% in June. Escalating oil and food costs are having a negative impact worldwide by leaving consumers with less money to spend on other goods.
While many have marginalized the impact that the U.S. now has on the world economy, we continue to believe that as the U.S. goes, so goes the world. A prolonged economic slowdown in the U.S. will have global ramifications.
However, we also believe that the economic recovery will also begin in the U.S. before spreading to Europe and rest of the world. The positive effect of this recovery will be felt first by companies that generate much if not all of their revenues exclusively in the U.S. This is in stark contrast to the past few quarters where the companies that have outperformed Wall Street’s expectations are those companies with significant revenues coming from international sources.
So while we don’t believe that we are at an inflection point yet, once we do start to see some signs of a sustainable recovery, domestic stocks may be the first to benefit. We would expect to see companies like eHealth (EHTH), LoopNet (LOOP) and Internet Brands (INET) outperform companies that have significant international revenues such as Monster (MNST), Amazon (AMZN), and other international stocks.