A rising pound may spell good news for holiday-makers looking to get more bang for their buck abroad, but could alarm the bigger companies in the FTSE index.
FTSE firms that make most of their money from sales outside the UK have ridden a wave of increased earnings as a result of the plunging value of sterling following the vote to leave the European Union in June 2016.
The weaker sterling is, the higher a company’s overseas earnings translate back into when converted into British pounds.
Weak sterling means companies selling overseas see a boos to earnings
The pound rose to a brief post-Brexit high of $1.43 in recent days, its highest level since the Brexit vote.
Sterling has slipped back a bit this week after the recent gains, however investment director at AJ Bell Russ Mould noted that if the shift upwards in the pound’s value returns and the dollar falls, it could prove challenging for FTSE 350 companies.
‘A sustained slide in the buck could start to exercise investors in UK stocks, many of whom have been able to ride the pound-down, dollar-up, FTSE-up trade which has persisted ever since Britain voted to leave the EU in June 2016,’ he said.
After 18 months languishing at rock-bottom lows the British pound’s recovery could spell the end of a gravy train for global firms listed in London.
‘It will be interesting to see if a sustained advance in sterling prompts a rethink and if it begins to crimp earnings forecasts at overseas earners,’ Mould added.
While Mould’s prediction that firms in the beverages, mining and industrial engineering sectors could see earnings hit, Ben Kumar of Seven Investment Management argued that rising global growth trumped any impact from currency movements.
Quids in: Not everyone agrees that currency movements have such a big impact on firms
The FTSE could in fact climb further on the back of rising global growth, not fall as a result of a stronger pound, Kumar said.
The boost offered by a weak pound has fallen away over the last 12 months, he said, and has even been a drag on FTSE 100 earnings as analysts had factored in the currency boost when examining earning estimates.
Kumar said: ‘The surprise in 2018 could be a resurgence in FTSE earnings, powered by the positive global growth environment.
‘Indeed, analysts have revised FTSE 100 earnings estimates for 2018 upwards by the most in the developed world over last three months – other than the US, where businesses are benefitting from the weak USD in the same way as the FTSE did last year.
Even with a weak dollar, Kumar believes global growth will help lift all companies.
‘For most of the companies the global growth scenario trumps the weak Dollar. So for BP/Shell the weaker dollar is an issue, but it is outweighed by the price of oil – up 25 per cent in the same period as the dollar is 13 per cent weaker.’
All of this does not equate to how the UK economy itself is performing, either.
‘The FTSE 100 is not a good proxy for the UK economy! The largest companies are large global banks, pharmaceutical companies and oil producers. Not a lot of connection with the man in the street,’ Kumar explained.