Some investors don’t realise the extent to which the FTSE 100 is truly international. Even though constituents within the index are listed on the London Stock Exchange, the revenues and profits don’t have to be earned in the UK. But despite the majority of FTSE 100 firms being net exporters, there are some genuinely British-focused businesses that are in the FTSE 100 too. And it’s these top British stocks that I’d be buying at the moment, as I think they could outperform the index as a whole.
A good example highlighting a difference between ‘international’ firms versus ‘British’ ones is the exchange rate impact. More specifically, the relationship between the British pound (GBP) and the FTSE 100 index. Due to many international firms having to repatriate overseas earnings back into GBP for reporting requirements, a falling GBP actually boosts the FTSE 100 index!
Given that GBP has been historically weak against peers over the past couple of years, this has acted as an artificial boost for some large exporters. But with many City analysts forecasting a bounce-back in the value of the pound over the next year, this could be a key reason why British stocks could outperform international ones. If you mainly operate here in the UK, there’s no negative impact of a strengthening pound. As for exporters, the exchange rate could become a hindrance instead of a help.
I acknowledge that this topic is very subjective. I’ll present both sides in the interest of fairness. What some are thinking (which I’m leaning towards) is that the government is actually keen to push for a deal before the deadline of the transition period at the end of the year. If this happens, then positive sentiment will flow through into the stock market. Given that previous Brexit headlines with a positive slant have boosted British stocks, I think this could be the same going forward.
For example, housebuilders such as Taylor Wimpey and banks like Lloyds Banking Group saw share price gains on selective days last year that coincided with good Brexit news.
Covid-19 government support
The final reason I think British stocks will outperform this year is thanks to the fiscal stimulus from the government. Even on the world stage, the stimulus provided by the UK is very supportive. For example, UK employers can benefit from the furlough scheme. The higher the employment count for a business in the UK, the larger the benefit will be. Grants, loans and other measures also act as a support network for suppliers and contractors of FTSE 100 British firms.
Take a company like Severn Trent, a predominately UK business. Not only does government aid help the business directly, but also indirectly. Suppliers of the firm, be it manufacturers or otherwise, are likely to be UK-based as well. The stimulus these business will have received in turn helps Severn Trent to keep operations running efficiently. This efficiency is unlikely to be as high with international firms listed on the FTSE 100.
Overall, local forces at work here in the UK could give top British stocks a real boost in the mid term. I think it could outperform the FTSE 100 as an index, and so would take action by looking to buy into these firms now, for the rally to come.
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Jonathan Smith owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.