The FTSE 100 isn’t a bellwether for the UK economy. In fact, more than half of the revenue generated by the top 100 firms listed in the UK comes from overseas.
As a result, the FTSE isn’t representative of the economy, and many of these companies may actually perform better when the pound is weak. This is because earnings in sterling are inflated when a company translates its overseas revenue back into pounds. Although a weaker pound will see the cost of inputs from overseas increase.
The pound has been weak against the dollar for a while now. Before the 2008 crash, one pound was worth around two dollars. The Brexit vote also saw sterling’s value drop against other major currencies.
I’m looking for firms that might perform well under the current conditions. So here are two FTSE firms that could prosper as the pound drops against the dollar and other currencies.
Diageo (LSE:DGE) is one of the most robust UK shares. It has delivered a return of over 50% in the past five years. The alcoholic drinks giant reports in sterling but generates the majority of its sales in other countries. As a result, it is well-positioned to benefit when the pound it weak.
In its recent January update, the company said foreign exchange rates negatively impacted earnings. However, there has been a considerable change in exchange rates since the end of 2021. At the beginning of the year, one pound was worth $1.35. Now it is worth $1.21.
This change should reflect positively in the next financial update.
There are clearly issues around the cost-of-living crisis in the UK and global inflation that might reduce spending on alcohol. However, this could be offset by changes in the exchange rate.
Deutsche Bank recently put a sell rating on the shares, noting challenges faced by the consumer. Although, personally, I don’t think there’s a perfect correlation between economic downturns and alcohol consumption. I’d happily add Diageo to my portfolio.
Antofagasta (LSE:ANTO) is a mining company that primarily runs assets in Chile. The group extracts and processes the raw materials — mostly copper — before shipping them off and selling them. Most of the firm’s products are sold in Asia.
Only 1% of the company’s revenue actually comes from the UK, so the majority of its revenue comes in the form of dollars. Around 25% of revenue comes from Japan, while 17% is from China and another 17% from Switzerland.
Copper prices have tanked in recent months and this has been reflected in the Antofagasta share price. However, its recent performance has been impressive. Revenue jumped last year following a 47% rise in the copper price.
In the long run, I see an era of scarcity defined by higher commodity prices, so I’d buy Antofagasta stock, regardless of the current challenges.