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How Recent Foreign Currency Fluctuations Affected Major Stocks

Companies / Company Chart Analysis May 12, 2016 - 12:26 PM GMT

By: Nicholas_Kitonyi

Companies

Investors can never shy away from the stock market because of the several benefits that come with investing in income generating assets. However, over the last few quarters, this market has been greatly affected by the non-income generating assets such as commodities and currencies.

Even the most popular stocks have not been spared in this case. Multinational companies listed on major exchanges such as the NYSE, NASDAQ  and the London Stock Exchange have been affected by global currency fluctuations as the USD, the GBP and JPY among other major currencies continue to fluctuate from one reporting quarter to the next.


Now, if you look at some of the world’s largest stocks by market capitalization. They have presence in virtually every region of the world. For instance, British Petroleum, BP Plc (BP) is present in Europe, Asia, America and Africa; where as Apple (AAPL) generates its sales from nearly every country in the world.

Under stable currency markets, it would be very easy to project sales for a particular quarter or financial year without much deviation from the actual results.  However, if global currencies remain, as volatile as they are, the chances of doing that drops to a bare minimum. If you take a look at the various currency exchange rates posted on various platforms such as http://internationalmoneytransfers.org/, then you will get the clear picture just how rates can differ from one country to another.

Illustratively, when Apple reported its fiscal Q1 results, it noted that foreign exchange affected its top line to the tune of $5 billion. This is not a small number. Incidentally, Apple’s stock price has been falling in the recent past thanks to a squeezing top line as iPhone sales growth rate continues to decline.

At the moment, China accounts for at least 25% of Apple’s total revenue, which means that going forward; the company will continue to experience foreign exchange risk attached to its sales growth. Investors have not been kind enough to witness this as a macro-effect and have thus participated in driving the company’s stock price to new multi-month lows. As such, Apple as a major stock has been heavily affected by global currency fluctuations in a way that investors deem as an investment risk.

The trade-weighted USD index has gained 18 basis points over the last two years rising from 102 basis points to 118 basis points as of May 2 of this year. In January, the index hit 125 basis points. Again, this illustrates the level of volatility which multinational stocks especially those that do their reporting in USD terms have been exposed to in the last two years.

All company profits and sales are attached to a certain currency value and depending on how many countries a particular company operates in, it is bound to experience some gains/losses on foreign exchange translations when reporting quarterly and annual results.

Conclusion

In the case of Apple, the initial selling price for its products is quoted in USD. This means that as retailers put the products on their shelves, they will have to factor in the impact on sales based on the exchange rate for their local currency.  Some customers also take this very seriously when buying multinational products quoted in foreign currency.

As such, when Apple sells the product via its own stores globally quoted in USD, they are still affected because now, buyers must consider their decision to buy based on global currency fluctuations.

Therefore, the stock market cannot escape from the effects of foreign exchange, and fluctuations experienced over the last few quarters demonstrate just how unpredictable stocks can be when foreign exchange and currencies are not stable.

By Nicholas Kitonyi

Copyright © 2016 Nicholas Kitonyi - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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