A plethora of companies have been complaining that their earnings have suffered from the strength of the pound. Sterling rose by over 15% against the dollar in the 12 months to July 2014, though it has pulled back somewhat since. Share prices have been punished.
But that could change, and it could be a good time to stock up on shares whose fortunes are geared to the dollar. I see three particular risks to sterling. In descending order of importance they are:
1. Scottish Independence
Analysts at Morgan Stanley have estimated that the value of sterling could drop by up to 10% if the Scots vote for independence next month. Their analysis is founded on the political and economic uncertainty that would follow, together with vulnerability in the UK’s trade balance.
With the ‘Yes’ and ‘No’ campaigns running close in the polls, and the unprecedented nature of the Referendum, nobody will know how the vote will go until the results are declared.
2. A Labour Government
With the exception of the Blair years, traditionally Labour administrations have been bad for sterling. The current Labour leadership has criticised the Government’s ‘austerity’ regime, whilst its plans to freeze energy company prices, break-up the big banks and renationalise parts of the rail industry scarcely fall under the heading of ‘business-friendly’.
Opinion polls might give us a steer on the General Election’s outcome, but the very uncertainty is itself likely to exert some downward pressure on the pound.
3. Reversion to the Mean
Sterling has made up roughly half the ground it lost since the crash. Will it carry on and recover its former value, or fall back after two years of strengthening? I have little faith that professional economists have the answer. But I suspect that over time the impact on share prices of sterling’s recent strengthening will diminish, if only when the next reporting round is compared against softer comparatives.
Shares to buy now
HSBC (LSE: HSBA) (NYSE: HSBC.US) is one stock that should benefit from a weaker pound: it declares its dividends in dollars. The stock is largely a play on the global economy, especially Asia-Pacific, but its wide geographic spread, strong capital base and conservative management make it relatively defensive, whilst a 4.6% yield is attractive.
Diageo (LSE: DGE) (NYSE: DEO.US) has an expensive rating due to its strong global brands coupled with exciting emerging-market growth prospects. But the shares are now relatively cheap, down over 11% this year, in part due to currency headwinds, in part due to the economic slowdown in emerging markets. Diageo also produces the tipple-of-choice of bureaucrats in China, where a crackdown on corruption has reduced gift-giving.
GlaxoSmithKline (LSE: GSK) has suffered higher-profile fallout from its entanglement with Chinese corruption. But again the longer-term story is positive, with intrinsic value encapsulated in pharmaceutical patents and over-the-counter brands, together with emerging-market growth prospects. Under 6% of its revenues come from the UK, and the shares are 9% cheaper than at the start of the year.
