As a general rule, a weak pound is good for the FTSE 100 as a large proportion of the companies that make it up do most of their trading in overseas currencies. If the pound falls and a company generates most of its profits in the dollar, for example, then those profits immediately rise when measured in sterling.
The pound has fallen to a 35-year low against the dollar. Against the euro it is just eight pence away from parity. Covid-19 has not brought good news for the pound.
Buy some companies big in the US
Under normal circumstances, the appropriate response for investors in times when the pound is weak is obvious – buy shares in companies that do most of their trading in overseas currencies.
These are not, to state the rather obvious, normal circumstances.
Most companies are struggling. The exceptions are those that either provide essentials, or sell products that might benefit from more people staying at home. (By the way, I don’t agree with the idea of investing into companies that supply toilet paper or other products for which there is currently a shortage. Once this crisis ends, all those hoarders of toilet paper will find they have enough to last for months, and sales will reverse.)
I don’t think now would be an especially good time to invest in a company solely because of Covid-19-related demand, since that may reverse as well.
Also, once the crisis ends, the pound might recover. So this is a time to be very choosy.
Focus on good companies that you might have considered investing in normally, but for whom you think falls in the pound provide an additional opportunity. From this list of good companies, if you can then find a company that either sells essentials or products that might be especially popular in these times and which are also big exporters, then you might have found a good investment.
Five companies to look at
The UK’s biggest exporters to the US are GlaxoSmithKline, Johnson Matthey, Mondi Group, Rio Tinto, and Smith & Nephew.
The case for GlaxoSmithKline shares has been made many times. I would say that right now, thanks to the weak pound and the fact that the share had fallen around 23% this year, the GlaxoSmithKline share price seems quite attractive.
Johnson Matthey is a leader in sustainable technologies. That might not be a priority right now, but I think this is a good company. Its shares have fallen massively over the last year, and it should benefit from the cheap pound.
Mondi is in the paper and packaging business. Mondi shares may benefit from a rise in online shopping during the crisis.
I am not so sure about Rio Tinto. Its supply chain has been hit by Covid-19-related issues. I am not arguing against Rio Tinto shares in general, I just think that Covid-19 might cancel out the benefits of a cheap pound, especially as sterling may not be so cheap after the crisis.
Finally, Smith & Nephew is big on knee implants, which are not really a priority right now. It has in any case warned that Covid-19 might hit sales.
Shares in GlaxoSmithKline and Johnson Matthey, plus the Mondi share price, might do well in this environment of a cheap pound.
It’s ugly out there…
The threat posed by the coronavirus outbreak has spooked global markets, sending stock prices reeling.
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Michael Baxter has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.