Many of Europe's largest companies are exporters, so when the dollar is strong, revenue generated Stateside gets translated into more euros, British pounds or Swiss francs upon return.
Plus -- by definition -- a strong dollar means a weaker rival currency, so local labor costs are comparatively lower.
But that relationship has completely fallen apart, according to research published Monday by Nomura Securities.
"Since Sept. 2008, a falling dollar has been associated with an outperformance of those companies that have (a) top-quartile sales exposure to the U.S. and (b) have (historically) displayed a top-quartile statistical correlation with the dollar -- strong dollar associated with outperformance," the brokerage said.Nomura identified 30 companies including Airbus owner EADS (FR:EAD 14.21, +0.27, +1.93%) , Mercedes maker Daimler (DAI 47.11, +1.59, +3.49%) , cosmetics giant L'Oreal (FR:OR 61.12, -0.10, -0.16%) and software producer SAP (SAP 47.69, +0.86, +1.84%) as being in the dollar-sensitive camp.
So what's going on?
The strategists said that these dollar-sensitive stocks have changed in price due to changing multiples on what their earnings should trade on.
"This change in stock level correlation has not been a result of changing earnings; it is a result of movements in multiples. With 'dollar-sensitive' stocks doing well recently, despite the weak dollar, their valuations have risen to a premium," Nomura noted.And that could lead to some risk ahead for these companies.
"While we would conclude that the overall market performance is likely to continue to be driven by factors other than the dollar exchange rate, it seems to us as if the 'dollar stocks' within the market are vulnerable," they advised.
"If the dollar rallies, this basket may respond positively, however. Relative valuations are already on the high side. Moreover, if the dollar continues to weaken against the euro, presumably at some point, the currency effects will show through and hamper their ability to grow earnings."
