PRIVATE investors do not usually give too much thought to currencies. Although a weak pound is noticed on foreign holidays or at the petrol pump, the impact on portfolios is more subtle and gradual moves may not trigger action.
In the three years since the Brexit referendum the pound has lost a fifth of its value against the US dollar, but is that a signal of worse to come or does it mean there is value in British shares?
Concerns about the future of UK trade have driven the currency collapse. Many overseas investors have sold out their British shares, fearing a downturn in the British economy and further weakness in the pound. It has been difficult for domestic investors to absorb this selling. Even British government debts – gilts – are now priced at a much lower rating than those from more troubled economies. It seems that international investors would rather borrow money from governments in Portugal and Spain than Britain. This is partly driven by concern about UK inflation prospects, but nevertheless seems remarkable.
Stock-market investors are often poor judges of politics and currencies. Even compounded over many years, a relative fall in the value of the British economy by anything like 20 per cent remains unlikely. And, for stock-market investors, the cheaper currency helps British exports and the value of overseas earnings within multi-national British companies. Commodity and energy businesses, with their activities largely priced in US dollars, look more attractive now to British investors viewing value in pounds. The sentiment is perhaps understandable when every political development is matched to headlines of a “pound slide”, which is often of a fraction of 1%. Investors can guess a trend and extrapolate. The stock-market move becomes driven by fear of the unknown and feeds on itself.
In the past, an undervalued currency has often attracted foreign bidders. Already brewer Greene King has seen a bid from Hong Kong, with the £2.7 billion value of the takeover 50% above the previous stock-market price of the shares. Apart from highlighting the value there might be in UK plc at a bargain level of the pound, it also reminds us that even now there are some less politically stable places than the United Kingdom.
Typically, even where private and institutional investors undervalue businesses listed on the stock market other corporate buyers are quick to recognise the long-term opportunity. Many British businesses are leaders in their field and, in a European context, British companies are winners in online businesses. For example, six months after the Brexit referendum Edinburgh-headquartered Skyscanner was bought for £1.4bn by China’s biggest online travel firm, Ctrip. Some of the value in UK businesses will be spotted by other firms, which may see the depressed pound as a real strategic opportunity.
Some UK investors are repositioning portfolios to focus more on overseas earnings. A number of FTSE100 companies have significant exposure to the robust US economy and this diversification can help make portfolios more resilient to further currency weakness. These businesses with overseas earnings have reacted well to the weaker pound, but the biggest opportunity now may be in domestic UK sectors. The currency move has lifted inflation as well as real wage growth. Many domestic service sectors are helped by this improvement in UK consumer spending power. And, while a break with the EU would undoubtedly cause a short-term shock, there may be a government spending boost to smooth the exit.
Investors should see the weak pound as a key indicator of sentiment. It adds an additional discount to the already depressed value of many British assets relative to historic norms. In time, it is likely that international investors will turn their attention to other problems, and worry less about Britain.
Colin McLean is managing director at SVM Asset Management.
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