Trade embargoes and global supply chain snarls: Globalization is clearly on the ropes. And that's a big problem for S&P 500 companies that embraced free trade with open arms.
Nine companies in the S&P 500, including materials firm Newmont and tech firm Lam Research, get more than 90% of their revenue from outside the U.S., says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. This makes them the most vulnerable to what's starting to look like a worldwide pullback of global trade.
"Globalization drove decades of growth and profitability with low interest rates and little inflation. Like most economic phenomena, that pendulum swung too far," said Jack Ablin, strategist at Cresset Asset Management. "We expect, and must prepare for, a reversal of sorts, one that, given economics and human nature, will likely swing too far the other way as well."
Who Needs Globalization Anyway?
S&P 500 investors are already starting to show their U.S. bias and turn away from globalization. And it might get more extreme the longer far-flung companies get punished.
Shares of the nine S&P 500 companies with the most revenue coming from overseas are down an average 5.5% this year. That's significantly below the the S&P 500's 2.8% fall this year. But more dramatically, shares of the 95 S&P 500 companies that report no revenue coming from outside the U.S. are up an average 3.2% this year.
And that's not to mention some of the country-specific debacles this year some global companies must deal with. The MSCI Emerging Markets Eastern Europe Index is down 80% this year. And the Russia RTS Index is down 45%. But even the Shanghai Stock Exchange Composite is off nearly 7% this year. That's a reminder of an even bigger risk than Russia.
Globalization was a boon for 40 years. "Those savings were split between consumers, who enjoyed often higher-quality goods and more attractive prices, and shareholders, who enjoyed skyrocketing profits," Ablin said. A new car, adjusted for inflation, is 43% cheaper now than it was in 1980 largely due to globalization, he says.
But now companies — and investors — are getting a reminder that globalization has its risks, too. "Many of the benefits of globalization have run their course, as multinationals wrung out most of the benefits of ever-cheaper labor," Ablin said. "Now, supply chains are kinked."
And investors continue paying a penalty being too global, too. "While there's still a case for including international stocks in a diversified portfolio, the diversification benefits haven't been as obvious over the past several years," said Morningstar's Amy Armott.
S&P 500 Companies With Big Global Exposure
Key technology companies that do much business outside the U.S. continue to feel the heat this year. Seven of the nine S&P 500 companies that get most revenue outside the U.S. are in the technology sector.
Take Lam Research. The company makes a variety of semiconductor processing gear. But it's also highly global, getting 95% of its revenue from outside the U.S. in the past 12 months. A push by regulators to move more high-tech production to the U.S. continues to weigh. Shares are down more than 20% this year. While not a perfect comparison, Intel, which gets less of its revenue outside the U.S., 82%, is up nearly 2% this year.
That's not to say simply being global means a lagging stock. When it comes to global S&P 500 companies, gold and copper miner Newmont stands out. With far-flung operations in Mexico, Peru and Australia, the company only reports getting a fraction of its revenue in the U.S. But thanks to soaring metals prices, shares of Newmont are still up nearly 27% this year.
But if globalization continues to reverse course, S&P 500 investors had better know the risks and their exposure. "The changing global trade landscape creates winners and losers," Ablin said.
S&P 500 Companies With The Most Overseas Exposure
| Company | Symbol | % of revenue from U.S. (last 12 months) | Stocks YTD % ch. | Sector |
|---|---|---|---|---|
| Newmont | 0.5% | 26.7% | Materials | |
| Monolithic Power Systems | 2.9 | 3.8 | Information Technology | |
| Lam Research | 5.2 | -20.9 | Information Technology | |
| Philip Morris International | 5.8 | -1.4 | Consumer Staples | |
| NXP Semiconductors | 8.7 | -14.5 | Information Technology | |
| KLA | 10.2 | -10.6 | Information Technology | |
| Texas Instruments | 10.4 | 1.3 | Information Technology | |
| Applied Materials | 10.5 | -10.1 | Information Technology | |
| Teradyne | 10.6 | -23.3 | Information Technology |
