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Currency Wars: A Race to the Bottom

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Currency Wars: A Race to the Bottom

Currency Wars: A Race to the Bottom

“Printing dollars at home means higher inflation in China, higher food prices in Egypt and stock bubbles in Brazil. Printing money means that U.S. debt is devalued so foreign creditors get paid back in cheaper dollars. The devaluation means higher unemployment in developing economies as their exports become more expensive for Americans. The resulting inflation also means higher prices for inputs needed in developing economies like copper, corn, oil and wheat. Foreign countries have begun to fight back against U.S.-caused inflation through subsidies, tariffs and capital controls; the currency war is expanding fast.” – Jim Rickards, Currency Wars

Many consider deliberate currency devaluation to be a tool that can help jump start a nation’s economy. The aim of such a practice is to increase exports while encouraging domestic purchases by making goods outside of the country relatively more expensive.

However, like any good prisoner’s dilemma, this might be the case if only one country acted in isolation. The reality is that many major countries engage in the same policy, and the end result – as the infographic details – is a race to the bottom.

So far the “winner” in the race is Japan. The BoJ has been rolling with the Abenomics plan for almost two years now and the results are in…

yen

The BoJ’s balance sheet has since exploded in size and they also have the highest public sector debt in the world.

Japan Public Debt

Original infographic from: Saxo Markets UK

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Markets

The Dominance of U.S. Companies in Global Markets

U.S.-based companies have a heavy weighting in global equity markets. In most industries, their market capitalization exceeds 50% of the total.

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U.S. Companies Dominate Global Markets

Are global indexes as “global” as you think they are?

With the aim of tracking market performance around the world, these indexes incorporate securities from various regions. However, while the number of securities may be relatively well diversified across countries, a dollar perspective tells a different story. When market capitalization is taken into account, country weightings may become much more unbalanced.

Today’s visualization is based on a concept by S&P Dow Jones Indices that shows the percentage of U.S.-based companies in global sectors and industries as of December 31, 2019. The calculations reflect the market capitalization of companies in the S&P Global Broad Market Index (BMI), an index that tracks over 11,000 stocks across 50 developed and emerging economies.

Percentage of U.S. Companies by Sector

U.S-based companies—those that maintain their primary business affairs in the U.S.—are a major component of many global sectors and industries.

Here’s how it breaks down:

Sector% of U.S.-based CompaniesMost U.S.-heavy Subsector
Information technology73%Software (86%)
Health care65%Health care providers (82%)
Utilities53%Electric utilities (57%)
Real estate51%Equity REITs (69%)
Consumer discretionary49%Specialty retail (73%)
Consumer staples46%Household products (74%)
Industrials46%Aerospace & defense (73%)
Energy44%Energy - other (73%)
Financials44%Financials - other (73%)
Materials30%Chemicals (41%)

U.S.-based companies make up a staggering 73% of the information technology (IT) sector. However, China may soon threaten this dominance. The Made in China 2025 plan highlights new-generation IT as a priority sector for the country.

The U.S. is still the world’s leader, but China is coming up very fast.

Rebecca Fannin, Journalist & Author of Tech Titans of China

Healthcare is also heavily skewed towards U.S-based stocks, which make up 65% of the sector’s market capitalization. This weighting is perhaps not surprising given the success of many U.S. healthcare companies. In Fortune’s list of the 500 most profitable U.S. companies, 41 healthcare organizations made the cut.

The materials sector has the smallest weighting of U.S.-based stocks, but they still account for almost one-third of the overall market capitalization. Three American companies are in the sector’s top 10 holdings: Air Products & Chemicals, Ecolab, and Sherwin-Williams.

U.S. Equity Views in a Global Context

Given the high weighting of U.S. stocks in global sectors and industries, having a U.S. view is important. This refers to investors gaining a clear perspective on the risks and opportunities that exist in the country. Investors can consider the trends influencing American companies in order to help explain stock performance.

U.S. stock dominance also impacts geographic diversification. While it helps non-U.S. investors overcome their home bias, American investors may want to consider targeting specific international markets for well-rounded exposure.

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Finance

Intangible Assets: A Hidden but Crucial Driver of Company Value

Intangible assets – such as goodwill and intellectual property – have rapidly risen in importance compared to tangible assets like cash.

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valuing intangible assets

Intangible Assets Take Center Stage

View the high resolution version of this infographic by clicking here

In 2018, intangible assets for S&P 500 companies hit a record value of $21 trillion. These assets, which are not physical in nature and include things like intellectual property, have rapidly risen in importance compared to tangible assets like cash.

Today’s infographic from Raconteur highlights the growth of intangible asset valuations, and how senior decision-makers view intangibles when making investment decisions.

Tracking the Growth of Intangibles

Intangibles used to play a much smaller role than they do now, with physical assets comprising the majority of value for most enterprise companies. However, an increasingly competitive and digital economy has placed the focus on things like intellectual property, as companies race to out-innovate one another.

To measure this historical shift, Aon and the Ponemon Institute analyzed the value of intangible and tangible assets over nearly four and a half decades on the S&P 500. Here’s how they stack up:

Intangible vs. Tangible Assets

Source: Aon

In just 43 years, intangibles have evolved from a supporting asset into a major consideration for investors – today, they make up 84% of all enterprise value on the S&P 500, a massive increase from just 17% in 1975.

The Largest Companies by Intangible Value

Digital-centric sectors, such as internet & software and technology & IT, are heavily reliant on intangible assets.

Brand Finance, which produces an annual ranking of companies based on intangible value, has companies in these sectors taking the top five spots on the 2019 edition of their report.

RankCompanySectorTotal Intangible ValueShare of Enterprise Value
1MicrosoftInternet & Software$904B90%
2AmazonInternet & Software$839B93%
3AppleTechnology & IT$675B77%
4AlphabetInternet & Software$521B65%
5FacebookInternet & Software$409B79%
6AT&TTelecoms$371B84%
7TencentInternet & Software$365B88%
8Johnson & JohnsonPharma$361B101%
9VisaBanking$348B100%
10AlibabaInternet & Software$344B86%
11NestleFood$313B89%
12Procter & GambleCosmetics & Personal Care$305B101%
13Anheuser-Busch InBevBeers$304B99%
14VerizonTelecoms$300B83%
15ComcastMedia$276B92%
16MastercardBanking$259B99%
17NovartisPharma$252B101%
18WalmartRetail$252B68%
19UnitedhealthHealthcare$245B94%
20PfizerPharma$235B98%

Note: Percentages may exceed 100% due to rounding.

Microsoft overtook Amazon for the top spot in the ranking for 2019, with $904B in intangible assets. The company has the largest commercial cloud business in the world.

Pharma and healthcare companies are also prominent on the list, comprising four of the top 20. Their intangible value is largely driven by patents, as well as mergers and acquisitions. Johnson & Johnson, for example, reported $32B in patents and trademarks in their latest annual report.

A Lack of Disclosure

It’s important to note that Brand Finance’s ranking is based on both disclosed intangibles—those that are reported on a company’s balance sheet—and undisclosed intangibles. In the ranking, undisclosed intangibles were calculated as the difference between a company’s market value and book value.

The majority of intangibles are not reported on balance sheets because accounting standards do not recognize them until a transaction has occurred to support their value. While many accounting managers see this as a prudent measure to stop unsubstantiated asset values, it means that many highly valuable intangibles never appear in financial reporting. In fact, 34% of the total worth of the world’s publicly traded companies is made up of undisclosed value.

“It is time for CEOs, CFOs, and CMOs to start a long overdue reporting revolution.”

—David Haigh, CEO of Brand Finance

Brand Finance believes that companies should regularly value each intangible asset, including the key assumptions management made when deriving their value. This information would be extremely useful for managers, investors, and other stakeholders.

A Key Consideration

Investment professionals certainly agree on the importance of intangibles. In a survey of institutional investors by Columbia Threadneedle, it was found that 95% agreed that intangible assets contain crucial information about the future strength of a company’s business model.

Moreover, 98% agree that more transparency would be beneficial to their assessment of intangible assets. In the absence of robust reporting, Columbia Threadneedle believes active managers are well equipped to understand intangible asset values due to their access to management, relationships with key opinion leaders, and deep industry expertise.

By undertaking rigorous analysis, managers may uncover hidden competitive advantages—and generate higher potential returns in the process.

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