Sterling dropped to a 31-year low beneath $1.28 last week, as investors suggested uncertainty surrounding the EU exit has made the UK a less attractive place for investment.
With both exporters and corporates whose revenues are denominated in dollars set to benefit from weaker sterling, UK equity market performance has bifurcated in the weeks following the vote.
Defensives have been in favour with nervous investors, with stocks such as tobacco having the added benefit of international revenues. Mega-caps like GlaxoSmithKline have also prospered, but resource firms’ outperformance has also caught the eye of some managers.
James Illsley, manager of JPMorgan Asset Management’s UK Equity Core fund, said he had begun adding to oil and mining exposure at the start of 2016 due to cheaper valuations but also pointed to the post-Brexit boost.
“There are two levels of impact. You’ve got the simple [currency] aspect, so things like the mining stocks, and then you’ve got the improved terms of trade for those companies that have operations in the UK and are selling it out of the UK into overseas markets.
“There have [also] been operational and supply and demand improvements which pointed you towards those sectors, more so than the start of the year.
“The referendum result and the fall in sterling is an extra layer on top of that initial underlying improvement.”
James Ross, manager of the Henderson UK Alpha fund, acknowledged that worries about the UK economy were making globally exposed mining and oil stocks more attractive – despite the fact these firms are far from insensitive to the macroeconomic environment.
“If you believe the UK economy is going to really suffer and that the rest of the world will be largely immune and there won’t be a huge amount of contagion from the Brexit fallout then it is sensible to buy companies that largely generate earnings from outside the UK,” he said.
“We haven’t been doing that [since Brexit] but, judging by the share price movements, people have definitely been doing that.”
Fidelity International’s investment director Matthew Jennings also noted the trend of investors “dollarising” their portfolios, but said he continued to look beyond currency exposures to corporate fundamentals.
“What investors have been doing is dollarising portfolios, so moving into those sectors of the market that can give them more exposure to dollar earnings streams,” he said.
However, Mr Jennings warned investors to be aware of energy and mining stocks’ differing fundamentals.
Energy’s oversupply has begun to be addressed by cuts to production, he said. In contrast, renewed stimulus in China has meant the mining sector’s supply and demand imbalance remains firmly in place.
“You have to be careful about generalising across those two sectors. In the short term the same factor is at play: to a sterling investor a dollar earner is more attractive, and mining and energy stocks are dollar earners so that makes sense. But actually, when you look at the fundamentals in those two sectors, there are some quite meaningful differences.”
KEY NUMBERS
22%: Return for mining sector since referendum
13%: Return for tobacco sector, the next best performer, over same period
