Brexit-fuelled concerns continue to dominate and are causing many UK investors to reassess their portfolios. In this uncertain market environment, James Illsley, fund manager for the JPM UK Equity Core Fund, takes a look at how a Brexit scenario could—in fact—put a new shine on the FTSE 100.
So far, the currency has been the main conduit for anxieties, with the pound expected to be poised for extended weakness. The impact on UK equities is less clear at the moment, although there is the possibility that Brexit—and its corresponding impact on currency—could actually be positive for investors in the UK stock market.
The source of revenues for most FTSE 100 companies is overwhelmingly international, meaning that a weaker pound triggers a mechanical upgrade in reported earnings as a function of the currency translation effect. In other words, because multinational FTSE 100 companies tend to operate with a large overseas presence, most will benefit from translating their earnings back into sterling in order to report to UK shareholders.
For example, mega cap oil producer BP will typically have its oil assets priced in US dollars. If sterling is suddenly worth less relative to the US dollar, the translation effect is more pounds for the same amount of US dollar earnings. This will be the case for the majority of FTSE 100 companies, as many are simply reporting earnings that are sourced from overseas back to their home currency in their quarterly earnings reporting.
This preponderance of earnings derived from overseas in the FTSE 100 distinguishes it from the more domestically-exposed mid- and small-cap companies in the FTSE 250 and FTSE 350 indices. Although FTSE 100 companies have underperformed substantially relative to these UK small- and midcap stocks in recent years, dragged down by their exposure to the struggling commodities sector, that trend may be reversing. We’ve started to see initial indications that this is the case so far this year. In capital terms, the FTSE 100 is down 0.2% year to date, whereas the FTSE 350 is down marginally more at 0.4% and the FTSE 250 is down 1.8%.
James Illsley is portfolio manager of the JPM UK Equity Core Fund
Unless otherwise stated, all data is sourced from FactSet and J.P. Morgan Asset Management as at 01.06.16.
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