How investors can benefit from a weak pound
Sterling has been in freefall since Brexit and even a rebound to $1.24 would leave the currency some 17% below where it was before the EU referendum in June. With investors being warned to brace themselves for more volatility ahead, rather than panic, are there ways to benefit from the weak currency and what are the areas to avoid?
The FTSE 100’s global nature
One of the biggest beneficiaries so far from the pound’s demise has been the FTSE 100, the index of the UK’s largest companies. The index has surged since June, recently passing the 7,000 mark, while the country’s small and mid companies have languished.
Tom Stevenson, investment director for personal investing at Fidelity, explains this surge is because a weak sterling makes UK goods and services more competitive and British companies’ earnings more valuable on translation back into pounds.
Indeed despite being a UK index, nearly 70% of companies listed on the FTSE 100 derive their earnings from overseas given their global nature. As a result they have benefitted from the weak sterling, while those businesses which do little trading overseas and derive nearly all of their earnings from the UK shores, namely the small and mid caps, have seen huge share price falls.
“In the uncertain world of Brexit negotiations large caps offer broader global exposure and overseas earnings, protecting investors from any slowdown in the UK economy,” says Adrian Lowcock, investment director at Architas.
However Stevenson cautions that those investors wanting to take advantage of the FTSE 100’s recent rich vein of form should “tread with caution” as question marks linger over how long the currency effect can prevail if Brexit means a slowdown in the broader economy.
UK fund pick
Lowcock says: “I like the Columbia Threadneedle UK Equity Income fund. Manager Richard Colwell first sets an economic view and then looks for companies which will benefit from that picture.
“He runs a concentrated portfolio and although there is a bias to FTSE 250 companies, the fund is currently quite defensively positioned with exposure to pharmaceuticals (14%), personal and household goods companies (10%) and tobacco stocks (6.5%).”
Turning attention away from UK investments, Chelsea Financial Services managing director Darius McDermott, says if investors think sterling is either going to remain weak, or possibly fall even further, they should make sure they have some global or US funds in their portfolio. If the fund falls further against the euro, he says European funds could also look more appealing.
“In the global space we like the Baillie Gifford Global Discovery and Rathbone Global Opportunities funds, for US we like Hermes US SMID (small and mid) and in Europe we like Threadneedle European Select,” he says.
“If you think the pound has fallen as far as it would go then you can either just hold sterling in cash, or opt for a UK fund that holds domestic-facing companies like Franklin UK Mid Cap or Wood Street Micro Cap,” he adds.
“The bottom line is that no-one can be sure where the pound will head from here but it does seem prudent to position a portfolio for an extended period of sterling weakness,” says Stevenson.
He adds: “As ever the best defence against periods of heightened uncertainty like this is to make sure your savings and investments are as well diversified as possible. The performance of overseas investments in sterling terms since the referendum has been the clearest possible illustration of the benefits of keeping your eggs in a wide variety of baskets.”
Indeed AJ Bell’s investment director Russ Mould warns investors that using foreign exchange movements alone as the basis for a short-term investor’s strategy is a bad idea.
This, Mould says, is because not all sectors have this year stuck to the currency script with gas, water and multi-utilities all performing poorly even though, for example, the bulk of National Grid’s assets are in the US.
“This sector has done badly because of fears that interest rates and bond yields may rise around the world,” he says. “Electronics & Electrical Equipment, another dollar earner, has also done relatively badly.”