By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) -- Is it over, over there, for U.S. investors? Not if the U.S. dollar stays weak against other currencies.
A subdued dollar helps mutual funds that invest in developed and emerging markets, as well as U.S.-based companies with substantial international sales. Investors in pure currency funds would also gain an advantage.
Europe's Week Ahead:Philips, Nokia Europe Earnings
Results from tech bellwether Nokia and consumer electronics giant Philips to set the tone on first week of European earnings.
Here's why: Investment returns earned abroad are worth more in dollars, giving U.S.-based investors a currency-related boost. The same is true for U.S. companies doing business overseas -- revenues earned in local currency are more valuable when translated into dollars.
The currency effect for U.S. investors can be significant. For example, Brazil's market is up 44% in dollar terms this year through July 9, but just 21% in local currency, according to MSCI Barra. Like other commodity-based economies, Brazil's market and currency tends to rally when the dollar declines.
Meanwhile, emerging markets as a group have gained 31% in dollars, but 26% in local terms. And the benchmark Europe, Australasia, Far East Index, or EAFE, is up 1.9% in dollars, but down 1% in local currency.
There are several reasons to be bearish about the dollar. Both China -- the largest holder of dollar-denominated assets -- and Russia have been making noises about a world economy in which the dollar plays a lesser role. That would likely unfold over a long period, if it happens at all, but it is an issue.
Washington's effort to stimulate the flagging U.S. economy by selling massive amounts of Treasury debt also threatens the dollar's standing. An economic recovery in the U.S. and abroad would encourage investors to accept more risk, firm up commodity prices, and keep the dollar relatively weak.
"If the dollar weakened in the second half, that would be a big tailwind for corporate America at a time when it really needs it," said Alec Young, international equity strategist at Standard & Poor's Inc.
In addition to U.S. exporters, technology and energy stocks would gain most in that scenario, he said, as companies in those two sectors on average earn more than 50% of their revenues overseas.
As a group, companies in the Standard & Poor's 500 stock-index /zigman2/quotes/210599714/realtime SPX +1.06% booked about 48% of total sales from outside of the U.S. in 2008, up from 46% a year earlier.
Among the biggest international earners in 2008, according to S&P, were Qualcomm Inc. /zigman2/quotes/206679220/composite QCOM -3.30% and Nvidia Corp. /zigman2/quotes/200467500/composite NVDA -4.20% , which sold about 91% of their products overseas. Other technology bellwethers followed closely, at about 85%, including Advanced Micro Devices Inc. /zigman2/quotes/208144392/composite AMD -3.66% , Texas Instruments Inc. /zigman2/quotes/202237907/composite TXN -3.33% , Applied Materials Inc. /zigman2/quotes/209393259/composite AMAT -5.18% and Intel Corp. /zigman2/quotes/203649727/composite INTC -2.86%
Energy companies with a huge overseas footprints included Exxon Mobil Corp. /zigman2/quotes/204455864/composite XOM +2.23% and FMC Technologies Inc. /zigman2/quotes/207530935/composite FTI -1.34% , each generating about 75% of sales overseas.
Other big foreign earners are in the consumer sector, such as Coca-Cola Co. /zigman2/quotes/209159848/composite KO +2.34% and Avon Products Inc. , which counted 75% of sales outside of the U.S., and Procter & Gamble Co. /zigman2/quotes/202894679/composite PG +1.61% , with 60% of revenues coming from abroad.
Although traditional portfolio diversification largely failed in 2008, international investments are always prudent. Most investment advisers recommend committing a minimum of 15% of a total portfolio outside of the U.S., including 12% to developed areas and 3% to emerging markets.