As the pound crashed following Kwasi Kwarteng’s quasi-infamous ‘mini’ budget, many crafty currency speculators made a quick fortune, while savvy stock market investors are still mulling which companies are likely to benefit most.
Sterling has never been so weak, which in theory should make products sold by UK exporters potentially very much more attractive.
Shares of several of prominent exporters and others expected to benefit were at the top of the leaderboard in recent days, including fashion retailer Burberry, box-maker Smurfit Kappa and cruise operator Carnival on Tuesday.
But inexperienced investors were warned against making decisions too heavily weighted on the basis of something as volatile as currency markets.
Moreover, just as a feeble pound can lose or gain some strength on the whims of a politician or central banker’s loose word, the consequences of stumbling sterling can swing two ways for companies, with imports of energy and raw materials becoming more expensive, hitting profit margins.
The FTSE 100’s ranks has long included a strong proportion of exporters and companies that earn more of their earnings
It has been calculated that in recent years between two-thirds and four-fifths of the Footsie’s earnings are generated overseas.
“As long as sterling remains weak, international earners with a large part of their revenues in dollars continue to do well. In the large cap space that’s the tobacco and pharma companies,” says Liberum strategist Joachim Klement.
As well as British American Tobacco PLC (LSE:BATS), Imperial Brands PLC (LSE:IMB), AstraZeneca PLC (LSE:AZN), GSK PLC (LSE:GSK, NYSE:GSK) and Haleon PLC (LSE:HLN, NYSE:HLN), other examples of heavy dollar earners are US-focused construction and infrastructure sector trio Ashtead Group PLC (LSE:AHT), CRH PLC (LSE:CRH), Ferguson PLC (LSE:FERG), which all report in dollars.
Other UK exporters that have flagged benefits from a weak pound in the past or with the potential to benefit could include Aston Martin Global Lagonda, Burberry Group PLC (LSE:BRBY), Diageo PLC (LSE:DGE), Experian (LSE:EXPN) PLC, Dr Martens PLC (LSE:DOCS), DS Smith PLC (LSE:SMDS), Johnson Matthey PLC (LSE:JMAT), Mondi PLC (LSE:MNDI), Pearson PLC (LSE:PSON), Smith & Nephew PLC (LSE:SN) and Smurfit Kappa Group plc (LSE:SKG).
Some travel companies might be expected to benefit from incoming US visitors looking to splash their dollars like royalty, such as UK-focused hotel owner Whitbread PLC (LSE:WTB).
However, the other side of this coin is that the weaker pound diluted British travellers’ purchasing power abroad, as TUI AG (LSE:TUI) warned three years ago.
In the mid- and small-cap space, Klement highlighted 4imprint Group Plc (AQSE:FOUR), which has 100% of revenues in dollars, while others that have done well in the past from a weaker pound due to their high proportion of overseas earnings include Next Fifteen Communications Group PLC (AIM:NFC), Renishaw PLC (LSE:RSW), Tate & Lyle PLC (LSE:TATE) and Victrex PLC (LSE:VCT).
Research by AJ Bell suggests Craneware PLC (AIM:CRW) has the most US-exposed earnings of all:
- Craneware 100% of earnings from US
- 4imprint* 98%
- Ferguson 94%
- Ashtead 81%
- Somero Enterprises 80%
- Pearson 64%
- Ultra Electronics 63%
- Carnival* 56%
- CRH 56%
- GSK 44%
- BAE Systems 43%
Via AJ Bell, sourced from company accounts in last 12-month period. * All of North America
“As long as sterling remains weak, international earners with a large part of their revenues in dollars continue to do well,” says Klement.
Companies which have significant sales abroad, but report in sterling, also should benefit, Rob Burgeman, senior investment manager at RBC Brewin Dolphin.
“While not as spectacular as the first category of companies, these will often manufacture and sell locally, so their net profits will be commensurately higher when reported back in sterling terms," Burgeman says.
But while the notoriously volatility and unpredictability of currencies should make investors take caution, they do have real-world effects on investors’ portfolios and companies’ profits, says Russ Mould, investment director at AJ Bell.
“A number of these businesses announce their results in dollars so there is no direct translational impact from a stronger dollar,” he says.
“However, it is worth remembering that these businesses’ share prices are in sterling, so when the dollar earnings are converted to compare for valuation purposes, they will carry more weight.”
As well as the US construction trio, all three report in dollars, Mould points to healthcare software firm Craneware, which does pretty much all of its business in the states with hospital operators.
“Defence firms like Ultra and BAE Systems are heavily plugged into US defence spending with the US Department of Defense having one of the largest global military budgets.”
There is also the small translation effect even when companies report in US dollars.
For example, Mould notes that Ferguson reports in dollars and declares dollar dividends – though UK shareholders can elect to receive their dividend in pounds.
As a higher dollar buys more pounds and increases the value of the sterling dividend, the dividend of 166.5 US cents per share Ferguson paid last December was at $1.3451 rate for UK shareholders who chose to receive the payout in pence, resulting in a payment of 123.78p.
At current exchange rates the same dividend would be worth 144.05p, or more than 15% more.
Furthermore the weakness in sterling is also leading companies to make the most of its in other ways.
Diversified Energy Company PLC (LSE:DEC, OTCQX:DECPF) told investors it will launch a share buyback programme to benefit from the weakness in sterling.
There’s an additional effect that also contributes to benefits to these companies – and this article might be adding to it.
While technically, investors should look through the stronger dollar and the exchange rate gains in UK company revenues, in practice they don’t, says Klement.
This gives rise to a so-called ‘dollar multiplier’.
“Companies with more dollar revenues tend to perform better when dollar is strong because investors overestimate earnings growth,” he says.
Analysts at Credit Suisse said many UK international names look "abnormally cheap" versus global peers, citing BAT, Unilever PLC (LSE:ULVR), Prudential PLC (LSE:PRU) in particular, and have underperformed their peers.
The bank's strategists also noted that domestic UK performance tends to follow the path of sterling, highlighting that domestic UK stocks are trading close to norms on relative P/E but look "very oversold".
"Retailing and real estate tend to be the biggest losers if sterling weakens; pharma and beverages the biggest winners," Credit Suisse said.
"Of the domestic UK areas, we would overweight the banks. Their deposit rich status means that most of the rise in rates is not passed onto deposits. They offer deep value and the non macro factors (litigation, taxation, disruption and capital regulation) are improving. We would also favour annuity life companies."
Credit Suisse also said it "would be looking to buy UK pension deficits (e.g. BT Group PLC (LSE:BT.A)) or defensive short duration companies".