Despite Nancy Reagan’s famous “Just say no” campaign, the truth is… drugs can be good for you.
Indeed, I’m writing this dispatch while on drugs: a big ol’ dose of Panadol, the Tylenol of Europe,]. Hoping to knock out a headache I woke up with this morning in Tel Aviv.
Drugs have been very good for the Global Intelligence Portfolio, as well, which is really the point of today’s dispatch. In particular, Sanofi, a French drugmaker I recommended, has been performing well. (Note: For those new to Field Notes, Global Intelligence is a monthly, investment newsletter I write. You can read more about it here.)
The stock is up about 22% (including dividends) in less than a year. The S&P 500 is up about 4% over the same period.
Two factors are pushing the stock: The business it’s in (and recently notched successes), and its location globally—Europe.
On the biz side, Sanofi has posted a string of victories on the drug front.
In recent days, Phase II trials for a dermatitis drug and a multiple sclerosis drug both showed strong results. And late-stage trials for a drug to treat a rare blood disorder were also successful.
Then there was the news that a U.S. Food and Drug Administration advisory panel a few weeks ago recommended approval of a new experimental antibody to prevent respiratory syncytial virus (RSV) infections in infants. That’s a drug made by the French company and its partner in the effort, British giant AstraZeneca.
Those pharmaceutical successes account for about 19 percentage points of the gain Global Intel investors have so far collected. The rest of the gain—that other 4 percentage points—is the real subject of my message today.
And that brings us back to Europe…
Dollar Decline Means Higher Prices for Foreign Stocks
Because Sanofi is a French company, the stock’s home market is Paris. Which means that its home currency is the euro.
Though you can easily buy the company’s shares in America and in dollars, those aren’t the home-market shares. They are American doppelgängers known as ADRs, or American depositary receipts, that shadow the price on the home market. We buy them because they’re the easiest way to gain exposure to foreign stocks without the hassle of trying to open brokerage accounts elsewhere in the world. I have done that in more than a dozen countries, so I can assure you it can be a hassle.
When I first recommended Sanofi last August, one of the reasons I did so was precisely because it’s euro-based.
That has nothing to do with the euro specifically, however. Instead, it has everything to do with the dollar decline now underway.
Our greenback was the star of the currency world for much of 2022. That was entirely due to the Federal Reserve hiking interest rates at a historically obnoxious pace.
See, currency traders are agnostic investors. They don’t care about the color of the Monopoly money they own. They only care about what’s known as the “carry trade.” That’s the strategy of selling a currency with a low interest rate and buying a currency with a higher rate. They capture that spread between the two rates as their profit.
When U.S. interest rates were screaming higher, currency traders rushed to dump major currencies in favor of the dollar. So, the dollar’s value rose relative to other currencies.
But by last fall, it was clear the Fed was coming to the end of its rate-hike cycle and would slow its roll. It was also clear that the two major European central banks—the European Central Bank (ECB) and the Bank of England—were going to keep hiking rates to combat inflation.
Inflation is running hot in Europe because of the lingering impacts of war in Ukraine. For Britain, the stupidity of Brexit was always going to cause an inflation crisis.
Back when I wrote the original story recommending Sanofi, this is one of the comments I made: “I expect to see higher interest rates on the continent … That will narrow the rate gap between the dollar and the euro, and the euro will rise in value against the buck. That will see money begin to flow back into European stocks.”
And that is precisely what has happened.
The Currency See-Saw: Dollar Declines, Other Currencies Rise
Last August, U.S. interest rates were 1.83 percentage points higher than European interest rates. And 0.58 percentage points higher than in the U.K.
Today, Europe trails America by just 1.06 percentage points. The U.K., at just 0.06 percent points lower than the U.S., has effectively pulled level with America.
Moreover, the U.S. has stopped raising rates for now. Europe and the U.K. have not.
Indeed, the ECB recently said it expects even higher rates to come as it fights against inflation. Meanwhile, the Bank of England recently surprised with a half-percentage-point hike. Pooh-bahs there also say to expect higher rates.
So it is, then, that we get the dollar decline.
The greenback has been selling off against the euro and the British pound, as well as other world currencies. (It doesn’t help that much of the world is looking to overthrow King Dollar)
That trend will continue because the Fed is now between a rock and rock crusher. Much higher interest rates will cause a series of knock-on problems with consumer, business, and government debt that could undermine the U.S. economy and cause a deep recession.
All of this is to say that it’s a good moment to find your “gateway drug” into the world of foreign stocks. The dollar decline is a long-tailed trend. We can expect that foreign stocks are going to do well in dollar terms going forward amid dollar weakness.
As the dollar declines against other world currencies, foreign stocks are going to rise in value in dollar terms, even if they simply hold steady in their home market. That’s just the way the currency trade works. When one currency declines in value, another currency must rise by necessity.
So as the dollar declines, the euro rises, which means the value of each share of a foreign stock rises too in dollar terms.
It’s the win-win of owning exceptional foreign stocks like Sanofi: You benefit from the growth of the business, but also the decline of the dollar, which supercharges the dollar value of the stock.
And if that stock pays a dividend, well that’s a win-win on top of the win-win, because now the value of the dividends you receive is rising in dollar terms because the foreign currency payments you receive are buying more and more dollars.
Expect this trend to continue.
U.S. interest rates are very near their ceiling.
European and British rates are not.
More dollar decline is coming. And more price strength is coming for foreign stocks.