While currency moves aren’t a big deal for some companies, they do influence the value of others – namely importers, exporters and firms that trade American depository receipts (ADRs). Yet, for some reason, IROs I talk to don’t mention the influence currency moves have on their company’s share price. And this is very surprising – because the recent weakening of the US dollar is certainly having a direct effect on some stocks’ performance.
Today, the US dollar is worth less against some major currencies – most notably the British pound and the euro – than it has been for years. Without getting too deep into the economic effects of currency fluctuations, IROs should consider incorporating currency moves into IR discussions. This kind of information is useful to analysts and investors, some of whom are less informed on currency issues. Retail investors might be particularly appreciative of this kind of insight.
For companies whose income relies largely on the exporting or importing of goods, the effect of currency changes on their business is fairly obvious. The prices of goods will change in reaction to currency moves, having either a positive or negative effect on business.
For companies that trade ADRs, however, currency moves can affect stock price. Take HSBC, for example: as of mid-January, the company’s ‘ordinary shares’ in London were down 5 percent since December 1, 2004, while the bank’s ADR shares, which trade at parity to the ordinary shares, had gained over 2.5 percent.
Although ADR shares represent the same company and are fully interchangeable with ordinary shares, the move in the British pound forced the ADR price to trade up by changing the rate at which parity is calculated. So if you bought your HSBC shares on the NYSE in December, you would be making money – but if you bought the same shares abroad, you would be counting your losses.
While this phenomenon is pretty obvious when you look at HBSC’s stock charts, the same currency movements are influencing the performance of many ADR-listed companies. Of course, for big earners like Unilever, the effect of foreign currency appreciation is somewhat muted. This may seem elementary for IROs of international, ADR-listed companies, but some investors aren’t aware of how currency affects valuation – some aren’t even aware they’re holding ADRs, believe it or not.
From the IR perspective, the benefits of discussing the currency-related aspects of a company’s business are numerous. Firstly, the research and information IROs gather when preparing to address currency issues with investors leaves them better informed about global news and world economic issues, including those that don’t directly pertain to currency. Secondly, introducing currency into the equation can add ammunition to an IRO’s arsenal, as you will be better prepared to answer difficult questions from the Street.
From the investors’ perspective, especially more advanced investors like fund managers, some facets of the business model and the company’s structure are exposed and interrelated to currency moves and the politics associated with such changes. It might take some time for the CEO or IRO to work through conversations about these specific and often complicated issues, but interested investors can achieve an increased sense of clarity if the company can explain its relationship to currency fluctuation.
Research from several different currency banks indicates institutions currently shorting the US dollar will continue to hold those shorts, putting lasting pressure on the currency in the coming months. Improving global growth is offsetting some of the negative effects of the dollar’s weakness, but many policy-makers have started to accept the dollar’s low. All of these factors point to a continued weakening of the US currency.
Currencies are likely to remain front and center of economic discussions for some time. Therefore, IR professionals stand to benefit from a better understanding of their effect on share prices. What’s more, investors also stand to benefit from an IRO’s currency-related knowledge.
