Liz Truss’s premiership has been disastrous for the UK stock market. Nearly half a trillion pounds has been wiped off the value of UK stocks — many of which were already trading at a discount due to pandemic and Brexit-induced challenges.
A disastrous few weeks
Kwasi Kwarteng’s mini-budget was not what the markets wanted to hear. Earlier this week, the International Monetary Fund (IMF) criticised the UK government’s tax plan, warning that the measures will add to inflation and increase inequality.
Furthermore, on Tuesday, Moody’s suggested that the mini-budget risks “permanently weakening the UK’s debt affordability“, inferring that a credit rating downgrade could be on the cards.
The budget added to concerns that the UK was adopting characteristics of a developing market economy. Trade disruption, an energy crisis, rampant inflation, and now the country which once had the world’s largest economy, is now being closely monitored by international body known as the world’s lender of last resort — the IMF.
The FTSE 100 isn’t a reflection of the UK economy
The FTSE 100 has fallen below 7,000 having looked relatively stable around 7,500 in late summer. This fall largely reflects concerns about the UK economy, but it’s important to note that the index isn’t a perfect reflection of the British economy.
In fact, companies in the FTSE 100 derive approximately 75% of their revenues from overseas, meaning that a FTSE investor is heavily exposed to foreign currency. So as the pound depreciates further against the dollar, there will certainly be scope for some firms to inflate their GBP earnings.
Opportunity knocks
With the FTSE 100 trading around and below 7,000, I’m looking to top up on some of my favourite stock market picks. The obvious place to look is companies that derive a considerable proportion of their income overseas.
Diageo is one such company. In January, it said that foreign exchange rates negatively impacted earnings in the preceding six months. However, the exchange rate has changed considerably since then. In the past six months, the pound has weakened from $1.35 to the pound, to $1.07.
I’m also looking at buying more Unilever and Haleon shares. Both of these consumer good companies sell their products around the world. Unilever sells its products in more than 190 countries. And the vast majority of its income doesn’t come in the form of sterling.
Moreover, both these companies own household brands, and this gives them pricing power which is particularly important amid rampant inflation.
With inflation rising, banks also look like a good place for my money. There’s clearly a lot of concerns around the industry right now with the inflation-enhancing budget unlikely to do anything positive for credit quality.
But with the Bank of England base rate set to rise again, Net Interest Margins (NIMs) are getting larger. Banks are even receiving more interest on the money they leave with the BoE. My top pick is Lloyds — it is heavily exposed to the property market, but I’m fine with that.
