How International Markets Impact U.S. Stocks

How to Analyze International Exposure

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Netflix Inc. (NFLX) announced that it would add just two million international subscribers during its first quarter 2016 financial results compared to Wall Street estimates of 3.5 million. With investors concerned that the U.S. market has peaked, international expansion has become a priority for the streaming video provider as it looks to justify a lofty price-earnings multiple. Shares responded to the news by falling more than 10% lower over the following days.

Netflix’s growing reliance on international markets is a trend that’s becoming increasingly commonplace among U.S. companies. While many of these companies began serving U.S. consumers, long-term growth rates have pushed them to compete in international markets. Large companies in the S&P 500 generate about half of their sales from international sources, including both developed and emerging markets around the world.

In this article, we’ll take a look at some of the benefits and drawbacks of these trends and how investors can analyze the impact on their portfolios.

Benefits & Drawbacks

There are many ways that companies benefit from selling products and services to international markets. Of course, the largest benefit is that they have a larger addressable market, which increases the businesses’ long-term revenue potential. Investors benefit from increased diversification of revenue, which tends to improve long-term risk-adjusted returns.

A slowdown in the U.S. would have less of a negative impact on a company with 50% of its sales abroad.

The downside of selling products and services internationally is that a company is dependent on the health of different economies. For example, the U.S. has been a strong performer in 2016 and Netflix’s exposure to slower global markets ended up hurting them.

These companies may also have greater correlations to the overall global stock indexes since they tend to be larger companies with sales that depend on global economic health.

Investors should carefully consider these benefits and drawbacks when building their portfolios. Often times, the biggest mistake that investors make is failing to realize that the S&P 500 offers some level of international diversification. A portfolio that holds half S&P 500 and half global equity indexes might actually have more international exposure than the investor realizes. It’s important to look at all of these factors in order to build the exposure an investor desires.

Analyzing the Impact

Most companies report international sales data in the MD&A section of their 10-K or 10-Q SEC filings or in the business description at the top of the 10-K. When looking at these figures, it’s important for investors to look at trends over time as well as the current figures in order to get a good idea of where international exposure is headed. It may also be a good idea to look at customer concentration data that can be found in the same sections of the reports.

When it comes to exchange-traded funds (ETFs), investors can find the information in the fund’s prospectus.

Most ETF prospectuses provide a detailed breakdown of country exposure, industry exposure, and other important elements. Investors can also find this information on industry websites like ETFdb.com, which provides these kinds of breakdowns on all ETFs that it tracks through its system by aggregating the data.

It may not be necessary to track exact percentages of international sales, but the information is helpful when analyzing the risks associated with large individual positions. It’s also worth looking for specific risks that might emerge rather than overall exposure. For instance, a company with heavy exposure to India may warrant a second look if the Indian economy has shown signs of a slowdown alongside other emerging markets.

The Bottom Line

International markets have an enormous impact on domestic stocks and it’s important for investors to quantify that risk when building their portfolios.

Investors can find this information by looking at 10-K and 10-Q filings for individual stocks or prospectuses for ETFs. While international exposure isn’t a bad thing, investors should look for specific risk factors that might influence their portfolios in order to avoid any unexpected surprises.

Investors should also keep an eye on the overall health of the global economy given that nearly half of the S&P 500’s sales come from international sources. These numbers are only set to increase over time as domestic companies look internationally for growth opportunities.