Overseas earners are not doing as well as they did in past episodes of sterling weakness, but that may be about to change. Here are the stocks that have missed out, so far.
Liberum’s stock screen covers FTSE 350 companies with more than 50% of their revenues in US dollars but whose share prices have fallen by more than 20% this year.
The broker believes these companies have the potential to outperform in the coming months as investors learn more about the revenues boost from a strong dollar in future updates.
It says credit checking firm Experian generates two-thirds of its revenues in the dollar but has fallen by a third so far in 2022, while animal genetics firm Genus is down by about 50%.
Liberum has “buy” recommendations on the pair: “Both companies have been quite hard hit in their share price despite business going reasonably well so far and most of their exposure coming from the US (Experian) and China/Asia (Genus).”
Sterling has dropped 11% against the US dollar since the Ukraine invasion, adding to the cost pressures for those companies that depend on commodity inputs or imported goods.
However, a range of external factors mean international earners are not doing as well as they did in past episodes of sterling weakness. In 2016-17 and in 2019, international earners had strong positive returns, not the drawdown seen this year.
Looking at FTSE 350 stocks with more than 50% of their revenues in the US dollar, Liberum said these companies have dropped by 17.6% year-to-date. Exceptions include Compass Group (LSE:CPG) and Indivior (LSE:INDV), who remain in positive territory.
Given the current mood of risk aversion in markets, it will be no surprise to see US dollar strength continue in the near term.
The dollar is already at its highest level since 2002 against a basket of six major currencies and today reached parity against the euro, reflecting concerns that European central bank efforts to curb inflation will be hampered by energy shortages.
Tomorrow’s forecast US inflation figure of 8.8% is also set to ramp up expectations that the US Federal Reserve will hike interest rates by another 0.75% next month.
However, UBS thinks longer-term US dollar upside is likely to be capped by slowing US economic growth and market perceptions that the Fed will start to cut rates again in 2023.
It said recent US economic data has been mixed, including a week-on-week rise in the number of Americans submitting new claims for jobless benefits.
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UBS’s wealth management team advises investors against positioning for a sustained continuation of the US dollar rally.
They said: “The Swiss franc now looks more attractive than the US dollar as a safe haven, especially given the willingness of the central bank to allow currency appreciation to curb inflation.”
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