You pays your money and takes your choice, but in which currency?

by Andrew Leach

Follow the money is a longstanding investment strategy and in the last week the money in question has been sterling. The precipitous fall in the pound has been one of the major drivers of investment sentiment towards certain shares and away from others.

Sterling’s weakness is good for companies with international revenues and these make up a large proportion of the FTSE 100 – hence that blue chip index is ahead of where it was pre-referendum vote. However for more UK focused companies where currency is not a factor, uncertainty about consumer confidence and UK economic strength are weighing on investors’ minds.

Industrials

UK industrial companies straddle both domestic and international markets and have characteristically kept a low comment profile in the last week, during which their share prices have not seen the volatility of some other sectors.

As part of a scheduled trading update engineer Rolls-Royce said the referendum result wouldhave no immediate impact on its day-to-day business, although the medium and long term effect would depend on the relationships established between the UK, the EU and the rest of the world in the coming years.

More detailed were Rolls-Royce’s comment on currency impact – a potential £400 million positive on turnover. With such large swings possible analysts and investors will continue to try and spot the winners and losers in the sector.

Housebuilders

Losers were easier to spot in the housebuilding sector this week with some share prices halving since the referendum result on fears for an economic slowdown.

However, while there were undoubtedly sellers of shares in housebuilders, there were also some large bets placed by some very experienced industry players that the sell-off had been overdone.

This week Tony Pidgley, the veteran founder and chairman of London-focused housebuilder Berkeley Group, bought almost £800,000 worth of shares in the business. Elsewhere Galliford Try Chairman Greg Fitzgerald, who led the business for 11 years before becoming Chairman earlier this year, bought nearly £700,000 worth of stock in the housebuilder.

Across the sector, balance sheets are relatively ungeared, land banks are strong, dividends remain well covered and cash flow could be accelerated by slowing land spend.  In short, the sector enters any possible market downturn in far better shape than it did ahead of the 2007/08 credit crunch, but consumer confidence will be key.

Retail

Nowhere will the lack or presence of such confidence be more keenly felt than in the retail sector, where most operators are signalling caution. Although we have already seen Dixons Carphone talk about an opportunity to strengthen its market position.

The raft of stock market listed retailers reporting in September will be the point at which we can really gauge how footfall and sales have been affected post-Brexit, so it will be a long and fretful summer.

And as well as monitoring customers, retailers will be following the money and watching the currency markets nervously as the cost of importing stock rises and the ability to pass on price increases to customers comes under pressure.