It may be hard to believe, but Boris Johnson, the eccentric and often controversial former mayor of London, is now the 77th Prime Minister. He takes the country’s top job as Britain prepares for an exit from the European Union (EU) in mere months.
Johnson has earned a reputation for being unpredictable and unconventional over his long career, so it’s too early to say what his premiership means for the British economy and political landscape. However, some experts believe a steady decline in the value of the pound is now on the cards.
Although no one can accurately predict the future value of any currency, here are two FTSE 100 stocks I believe will benefit immensely if this prediction bears out:
Diageo
Global alcoholic beverage giant Diageo (LSE: DGE) will benefit from a decline in sterling for one simple reason – it earns in dollars and reports in pounds. According to its latest report, the drinks juggernaut earned 92% of net sales from outside the United Kingdom over the past year.
Since the vote to leave the EU in 2016, Diageo has implemented a market-sensitive, multi-country investment and capacity expansion strategy. Over the past three years, it has made its production more local in the countries where it operates in order to avoid potential tariffs on its products when existing trade deals fall apart.
The company has a robust balance sheet (£1.6 billion in cash), low exposure to Britain (8% of net sales), an attractive dividend (1.95%) and a track record of great performance (15% return on invested capital over 2018).
Long-term investors worried about the current political turmoil like me couldn’t ask for a better hedge than Diageo’s stock.
Vodafone
Another international brand with limited exposure to the domestic market is telecommunications giant Vodafone Group (LSE: VOD). The company is already one of the largest service providers in India, where hundreds of millions of new mobile subscribers are expected over the near-term. According to the group’s latest annual report, only 14.8% of total revenue was generated in the UK last year.
The rest of the company’s sales are most concentrated in Europe, with Germany, Spain and Italy contributing the most to Vodafone’s bottom line last year. A £2 billion deal to exit New Zealand, a merger with its Indian partner, Idea, and an acquisition of Liberty Global’s assets in Germany, the Czech Republic, Hungary and Romania have rapidly changed the group’s international footprint in recent years.
The wireless carrier has seen its financial performance and share price suffer since 2014, but I believe that’s made the valuation more favourable. Investors punished the stock after the company slashed its dividend, but the lower payout should help management deal with the debt burden and acquire valuable 5G assets for the next phase of wireless growth.
Nonetheless, Vodafone is considerably riskier than Diageo and if I had to pick between the two, I’d pick the latter.
Bottom line
It’s too early to say what impact Johnson’s leadership will have on stocks, but if experts are to be believed then the pound could steadily decline as his premiership hits its stride. Assuming that is the case, exporters like Diageo and Vodafone should see positive impacts on their reported earnings.
However, I would only bet on Diageo.
