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My new husband and I are heading to Canada next month and when we got married at the start of September a number of generous well-wishers gave us Canadian dollars to take on our travels. At the time they perhaps didn’t realise how generous they were being. Since our wedding day the British pound has fallen 5% compared to the Canadian dollar to hit an all time low. The cash we were kindly given in sterling is looking increasingly frail with each passing day.
The pound’s precipitous fall comes as Britain’s new chancellor Kwasi Kwarteng (who has been in the job for two days fewer than I have been married) unveiled historic tax cuts in a bid to help spur spending and get Britain’s economy back on track. On Friday, traders rushed to sell their sterling in favour of safe haven US dollars on mounting concerns that these tax cuts and the proposed borrowing will stretch Britain’s bank balance to the limit. The fact that the new government’s mini-budget came just one day after the Bank of England hiked interest rates in an attempt to curb surging inflation did nothing to help credibility. Economists and traders from Asia to the US are questioning the sense of Britain’s economic policy.
That leaves Britons and their businesses in a troubling position, especially as inflationary pressures bite. The cost of goods and services is climbing at the same time that the value of the pound is falling, making goods imported from overseas even more expensive. Many businesses have said that they will pass on these higher costs to their consumers, but higher prices mean higher inflation - compounding the problem. It’s little wonder the domestic-focused small and mid-cap markets have had a terrible 2022.
But all is not lost. For companies that rely on international business for a big portion of their earnings, falling sterling rates can be a good thing, especially if those businesses book most of their costs in pounds.
This explains why the internationally focused FTSE 100 has held up relatively well in recent months and is unlikely to be badly affected by the continued downward pressure on the pound. Weakness in the UK’s main market index in the last few days can therefore at least partly be attributed to indiscriminate selling. And herein lie opportunities.
Many of the UK’s biggest companies make most of their money outside of their domestic market and it is those that have strong footholds in America which are looking especially attractive as the dollar strengthens against the pound.
Top 10 FTSE 100 companies with exposure to US sales | |||
Name | Sales Last Year (m) | Proportion revenue - domestic (%) | Proportion revenue - US (%) |
Ashtead | 7962.3 | 12.39% | 81.35% |
Experian | 6288 | 13.47% | 65.55% |
Compass | 17908 | 24.76% | 62.26% |
Relx | 7244 | 20.00% | 60.00% |
Bunzl | 10285.1 | 12.19% | 59.74% |
National Grid | 18260 | 42.73% | 58.30% |
CRH | 30981 | 13.63% | 55.50% |
Smith & Nephew | 5212 | 3.63% | 51.00% |
Informa | 1798.7 | 7.54% | 50.34% |
Rentokil Initial | 2956.6 | 28.93% | 46.19% |
The environment is particularly flattering for companies which make their money in dollars, but report their financial results and pay their dividends in sterling. Investors in these companies will receive a foreign exchange boost in company payouts.
From our top ten table above, we particularly like the look of Experian (LON:EXPN) , Relx (LON:REL) and Informa (LON:INF) which are tech-based companies and therefore more sheltered from inflationary pressures than some of their peers. Margins have held up especially well at Experian and Relx, averaging 23% and 26% respectively in the last six years. Both companies enjoy high Quality ranks.
Experian
Relx
There is also a lot to like about medical devices company Smith & Nephew (LON:SN.) whose fundamental qualities are recovering after a difficult few Covid-years. Routine hospital appointments have started to return to normal and healthcare spending has gone with it. Smith & Nephew’s revenues returned to growth in 2021 and are forecast to accelerate this year and next. Operations margins at 12.7% in 2021 were some way short of their long-term average of 20% but it was a relief to see a recovery from 6.5% the previous year.
Smith & Nephew is also in an interesting position when it comes to acquisitions. The healthcare sector in general has been especially badly battered in recent months as the heat has come out of the highly pumped up Covid-stocks. But small cap healthcare is abundant in valuable intellectual property - for companies like Smith & Nephew sitting on healthy dollar-denominated cash reserves, there could be some bargains to be found in the UK’s small-cap healthcare space. While we’re very uncomfortable to point readers in the direction of a company with a StockRank of just 1, endoscopy specialist Creo Medical could be a potential acquisition opportunity for Smith & Nephew which has a growing endoscopy business itself.
Cash rich American companies might also be seeking out value opportunities in the British small and mid-cap space as both the UK market and the value of sterling falls. While buyouts aren’t the optimum investment opportunity for long-term investors, overseas interest could lift valuations of companies with attractive IP.
The mining sector has held up relatively well in 2022 as commodity prices have soared alongside inflation, but fears of an emergency interest rate hike (designed to curb that inflation) have put the mining stocks under pressure in the last few days.
But these are the companies which are least reliant on British revenues - Antofagasta (LON:ANTO) , for example, makes all of its revenue from its mines in South America. These businesses have been hurt by the swing in sentiment around what are perceived to be non-green companies in recent years. But demand for minerals mined from the ground is not going away. As positive returns become harder to find, investors might begin to put less focus on companies’ green credentials and instead seek those that can generate the greatest returns.
Top 10 FTSE 100 companies with exposure to non-UK sales | ||||
Name | Sales Last Year (m) | Proportion revenue - Intl (%) | Proportion revenue - domestic (%) | Proportion revenue - US (%) |
Antofagasta | 7470.1 | 100.00% | 0.00% | 0.00% |
Rio Tinto | 63495 | 99.62% | 0.38% | 12.62% |
Smith & Nephew | 5212 | 96.37% | 3.63% | 51.00% |
Reckitt Benckiser | 13234 | 94.42% | 5.58% | 29.27% |
BP | 157739 | 92.87% | 7.13% | 34.07% |
Anglo American | 43258 | 92.73% | 7.27% | 4.33% |
Informa | 1798.7 | 92.46% | 7.54% | 50.34% |
InterContinental Hotels | 2907 | 89.58% | 10.42% | 26.63% |
Bunzl | 10285.1 | 87.81% | 12.19% | 59.74% |
Ashtead | 7962.3 | 87.61% | 12.39% | 81.35% |
About Megan Boxall
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"The environment is particularly flattering for companies which make their money in dollars, but report their financial results and pay their dividends in sterling. Investors in these companies will receive a foreign exchange boost in company payouts." Thanks for this Megan, I think that is a particularly significant point right now.
I hope you and your husband enjoy Canada. We visited in July and I loved it, although- appropriately considering the nature of what we are discussing- I got the impression that the cost of living was extremely high. While some of the quirks of Canada (Expensive restaurants offset with huge portions, which probably makes cost-per-mouthful comparable to Britain), (Sales tax being added on at the till, rather than displayed on the shelf to give the visitor one final shock!), probably magnify this impression, my in-laws were full of woe about price inflation. I came back thinking that real world lived experience inflation was worse there than in Britain but also wondering how many months it would be before we were in that situation or worse...
Thank you for the article. Perhaps it is worth emphasising that the Commodity companies' revenue streams are usually dominated by USD pricing, so although, for instance, you show Antofagasta (LON:ANTO) as zero exposure to US, its revenue stream is predominantly USD. The energy market remains tight, and OPEC will manage rhetoric to maintain prices above $80/b probably, so BP and Shell should perform strongly in a weak GBP environment.
*Past performance is no indicator of future performance. Performance returns are based on hypothetical scenarios and do not represent an actual investment.
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Most interesting thanks. Surprised not to see BAT on your list as I thought they were mostly (90%+) ex-UK.