Talking Point  

Investors should focus on the home market, post-Brexit

Investors should focus on the home market, post-Brexit
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Investors should focus on shares exposed to the UK domestic economy in the years ahead, according to John Hudson, UK equity fund manager at Premier Miton.

He said the rise in the value of sterling relative to the US dollar is likely to benefit the UK economy as a whole, as it makes imports cheaper.

From an investment point of view, appreciation of sterling should improve the profitability of companies that derive the greater part of their revenue from within the UK, relative to the companies that generate most of their cash from abroad. 

Around 80 per cent of the earnings of FTSE 100 companies are derived from abroad, while for the FTSE 250 it is about 50 per cent.

If sterling gains in value, the productsthese companies sell overseas become more expensive, known as the transactional effect, while the value of sales made in overseas currencies is reduced if the value of those currencies weakens relative to sterling, known as the translation effect.

Companies that sell predominantly within the UK benefit from the strength of sterling as it makes the cost of oil and other raw materials used in their business less expensive. 

Mr Hudson said: “Sterling is likely to continue its recovery against the US dollar so investors may want to favour the more domestically-focused small and mid-cap sectors over multinational large caps.

"A stronger currency isn’t necessarily a bad thing for the UK economy as being dominated by consumption it benefits from cheaper imports.

"In fact, 2021 could be a strong year for consumption as consumers are finally able to spend the money they were unable to during 2020. According to the OECD, the saving rate for 2020 will be close to 20 per cent compared to 6 per cent in 2019.”

He added that if inflation rises across the globe, then UK companies in sectors such as mining would likely benefit. 

 david.thorpe@ft.com