It’s no great surprise to see the FTSE 100 moving higher in Thursday trade. The main driver of the advance has been the fast-developing Brexit omnishambles that has prompted major ministerial resignations and could possibly lead to the imminent departure of the Prime Minister herself.
Sterling has plummeted more than 1.5% against both the US dollar and the euro in shocking trading today, boosting blue-chip firms like Rio Tinto (LSE: RIO) and Imperial Brands (LSE: IMB) that report financial results in the dollar and thus benefit from any fall in the pound.
The political situation in the UK is only likely to get more tense in the weeks and months ahead as the government and its Brexit strategy disintegrate, meaning that sterling could continue to plough a southwards furrow. Indeed, UBS is forecasting that the British currency will fall to 1.22 against the dollar within the next three months, and that is assuming “a favourable outcome for Brexit negotiations.” It was last dealing just above 1.28
In this climate, the appeal of firms that report in foreign currencies is still stronger, and there’s plenty of great Footsie shares that can enable investors to ride this benefit. But I’m afraid neither Rio Tinto nor Imperial Brands are stocks that I believe are wise investments today.
First, let’s look at Rio Tinto. Stocks involved in the production of commodities are traditional lifeboats in times of political and economic turbulence like these, and so a cluster of such shares, from oil giant BP and gold producer Randgold Resources to copper play Antofagasta, have all been rising on Thursday too.
There’s far too much risk surrounding Rio Tinto to make it a wise investment, in my opinion. I’ve time and again referenced the dangers to the mining company’s profits outlook from the iron ore market, a sector responsible for almost 60% of group earnings, as production of the steelmaking ingredient ratchets up around the globe.
And fears of chronic oversupply in the medium term and beyond are being exacerbated by concerns over future Chinese steel production. Mills in the country are due to shut down over the winter in response to sharpening environmental policy from Beijing. And of course, the problem of intensifying trade-related bickering between China and the US weighs on the iron ore demand outlook too.
So what of Imperial Brands then? Well, like commodities, the historically sticky nature of cigarette consumption means that tobacco stocks are also a traditional safe haven in turbulent times.
Investors may have been piling in again on Thursday, therefore, but I believe the invincibility of these shares is a thing of the past. The legislative environment that has hastened the demand demise of its traditional combustible products is spreading to its next-generation products like e-cigarettes. And there’s no reason to expect the trading environment to get any easier.
Imperial Brands and Rio Tinto are both cheap, reflected by their forward P/E ratios which both sit under the bargain ceiling of 10 times. But neither these readings, nor their bulging prospective dividend yields of 7.9% and 6% respectively, are enough to tempt me to invest given their uncertain long-term profits outlooks. In fact, I reckon both shares could leave you with a very big hole in your pocket.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.