It’s clear that the weaker pound has been behind recent gains in the FTSE 100. That’s because around 75% of the revenues earned by FTSE 100 companies come from overseas, and big ‘dollar earners’, such as BP and Glencore, have massively outperformed more domestically-focused shares.
However, not all companies with significant dollar exposures have seen their share prices soar in the last few months. Such shares include those in the financial sector, where concerns surrounding the sector’s underlying fundamentals have kept valuations depressed.
Dollar link
Prudential (LSE: PRU), which earns around 40% of its IFRS earnings from the US, is actually a much bigger dollar earner than it initially seems. That’s because almost a further 30% of its IFRS earnings come from Asia, where local currencies are either directly linked to the dollar or — at least — generally follow in the dollar’s direction of movement against the pound.
In terms of its European embedded value (EEV) profits, which is a better measure of long-term profits, the share of earnings from the US and Asia is even higher, at 83% of the group’s total long-term business.
Prudential’s sizeable presence in the US and Asia is expected to underpin continued growth in the company. With a strong balance sheet and high levels of cash generation, the insurer appears to be well placed to capitalise on long-term structural trends in Asia — although macroeconomic headwinds are likely to linger in the short term.
City analysts expect the company to report earnings per share of around 120p for 2016, but if current exchange rate levels persist, investors could benefit from a further positive translational effect of around 5-7p a share. But even without taking into account of this additional currency benefit, shares in the Pru trade at a forward P/E of 11.4 and have a prospected dividend yield of 3%.
Lagging behind
Shares in Standard Chartered (LSE: STAN) have risen by 21% since the Brexit vote of 23 June, but that gain lags well behind its larger rival HSBC, whose shares have increased by 41% over the same period.
The lack of dividends may explain why Standard Chartered seems to be less attractive to investors, but there are also many reasons why the stock should do better. Firstly, the emerging markets-focused lender has considerably more of its assets overseas, and secondly, management appears to be pulling out all the stops to cut costs and improve its return on equity.
In addition, Standard Chartered seems deeply undervalued, with a price-to-tangible book value of just 0.69. However, as earnings are expected to come under pressure from the slowdown in emerging markets and rising restructuring costs, investors are concerned about whether the bank can earn its cost of capital in the medium term.
City analysts expect the bank to report full-year adjusted earnings per share before restructuring costs of around 27.5p this year, which puts its shares on an unappealing forward P/E of 24.6. But for 2017, analysts expect adjusted earnings to bounce back by 86%, which means its forward P/E could fall back to a more reasonable 13.2 times.
