Following Donald Trump's victorious presidential campaign, the U.S. Dollar (USD) emerged a winner as well. However, the strengthening dollar could create additional risks for some American industrial companies.
"There have been periods of time where USD moves appear to have been highly correlated with [the Electrical Equipment and Multi-Industry sector] and if this relationship reasserts, then the outlook for USD strength is probably the biggest risk to the bullish outlook for EE/MI," the analysts say.
Post-election, the USD has gained 4% and the potential for further strengthening is a major theme heading into 2017, analysts at Morgan Stanley wrote in a research note on Monday.
The U.S. Dollar Index (DXY), which measures the value of the U.S. dollar against a basket of foreign currencies, was gaining slightly on Monday, trading at around $103.14. Morgan Stanley's FX strategists expect the broad USD index to gain 6% over the next year, and top out in the second quarter of 2018, "driven by widening rate and investment return differentials."
That being said, if recent weakness in the Euro, Yen and Yuan continues, this could cause additional currency risks for the EE/MI sector.
Morgan Stanley says SPX Flow (FLOW) , Ametek (AME) , Illinois Tool Works (ITW) , 3M (MMM) and Fortive (FTV) are the companies most exposed to this issue given their above average exposures to those currencies.
They also suggest Stanley, Black & Decker (SWK) is at risk "given its well understood transactional mis-matches and significant EPS headwinds during 2015/16."
They add that the second derivative impacts of the U.S. Dollar strength will need to be considered with 3M, United Technologies (UTX) , Honeywell (HON) , General Electric (GE) and Ametek as they export more than 10% of sales from the U.S.
"More specifically, we note that FLOW (33%), DHR (31%), AME (25%), ITW (23%) and JCI (23%) are the most exposed to the Japanese Yen, the British Pound and the Euro, where we expect to see the most substantial translational headwinds," the analysts say.
Real Money's Doug Kass echoed a similar sentiment on Twitter as the dollar was strengthening Monday afternoon:
Again for emphasis non US companies and countries with US dollar based debt and US multi nationals about to face stronger headwinds ahead— Douglas Kass (@DougKass) December 19, 2016