Weak pound boosts UK shares

Shares in HSBC, BP and Vodafone – as well as other London-listed companies that generate a large proportion of their earnings outside the UK – are expected to gain ground in coming weeks if sterling weakens further.

Equity strategists at asset management firms say they are rebalancing their UK portfolios, and issuing new stock recommendations, following the pound’s continued weakness in the currency market – which earlier this week drove the sterling/dollar exchange rate below $1.50.

Sterling weakness tends to help investors with holdings in FTSE 100-listed companies as about 70 per cent of the index’s earnings come from outside the UK, according to Goldman Sachs. It can also benefit smaller exporters in the FTSE 250, which are likely to receive a “competitive boost” from a falling pound. Goldman’s strategists are therefore encouraging investors to take long positions in UK companies with exposure to foreign markets and short-sell or avoid UK companies whose fortunes are tied more directly to the domestic economy.

Stocks on the bank’s buy list include: Unilever and Diageo, the food and beverage groups that both trade on 15 times next year’s earnings; AstraZeneca, trading on seven times 2010 earnings; Pearson, parent company of the Financial Times; Imperial Tobacco; and Royal Dutch Shell.

Stocks deemed unlikely to benefit from weaker sterling are Balfour Beatty, Carillion, British Land, Hammerson, Premier Foods, Green King, Ladbrokes and Marks & Spencer. As these companies’ fortunes depend more on the UK economy, their share prices have been more closely correlated to movements in sterling.

The pound has fallen 29 per cent against the US dollar since hitting its last high in November 2007, and it is also down 27 per cent against the euro since its high in January 2007.

Fears that a hung parliament will lead to indecisive fiscal policy after the upcoming general election are now causing some analysts to forecast that sterling will remain in a slump for months. “It doesn’t look that great for the pound at the moment,” said Graham Spooner, equity adviser at The Share Centre.

However, Jason Butler of Bloomsbury Financial Planning, advised private investors not to make short-term decisions.

“Over the long term, there should be little impact on the returns one can expect – gains
and losses between countries should even out over time,” he said.

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