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UK stocks are well represented in my portfolio. In fact, they are the core part. And that doesn’t look like changing. This is because while the pound is weak, I’m concerned about investing in non-UK-listed stocks.
So why is that a concern? Well, if the pound starts to appreciate, and I’ve got dollar-denominated stocks, then I’m going to see my gains wiped out by the currency fluctuation.
As a result, I’m focusing on opportunities in the UK. But are there some stocks that could actually benefit from the weakness of the pound? Let’s take a look.
Why is the pound weak?
The pound’s fragility reflects concerns about the health of the UK economy. The UK is expected to be among the slowest growing developed nations in 2023, and will experience a 0.4% contraction in size.
The pound is certainly stronger than it was under Liz Truss, but her government’s impact still lingers. Investors worried that Truss’s plans weren’t going to be fully funded and this, in turn, would push up long-term government borrowing, notably from overseas.
Meanwhile, amid concerns about a global economic downturn, the dollar has become stronger — although there are signs it might have peaked.
Which companies can benefit?
Well, 75% of FTSE 100 revenues come from overseas. And that’s logical when you think of it. The biggest UK-listed companies aren’t going to be entirely UK-focused.
So companies that earn revenue overseas are likely to be somewhat insulated from the economic troubles facing the UK and will even see revenues inflated when converted back into pounds.
For example, the pound is currently around 13% weaker than it was against the dollar a year ago. As such, the value of USD sales will be inflated when converted back into pounds.
Top pick: Diageo
In January, Diageo said that a strong pound had negatively impacted earnings. However, things have changed since then. Now, £1 is worth just $1.20, down from $1.35 a year ago.
A weak pound can also push up costs, but the 13% fluctuation will definitely improve revenue generation. Upwards of a third of its sales ($6bn) come from North America. This is double the firm’s earnings in Europe. But shoppers switching to cheaper brands remains a risk.
Second pick: Unilever
Unilever is a fast-moving consumer goods outfit that sells in 190 countries around the world. The London-based giant says that 3.4bn people use its products every day. Meanwhile, 58% of its income comes from emerging markets — providing healthy exposure to growth markets — while some 17% of revenues come from the US. Yet it faces the same risks as Diageo.
Third pick: Haleon
Haleon is new to the FTSE 100. That’s because it was formed from a demerger with GlaxoSmithKline earlier this year. Haleon operates in more than 100 markets worldwide and has an established presence in several parts of the market. The London-based firm also has strong partnerships with mass retail and pharmacy chains in the US. It comes with risks too, most notably legal issues linked to the Zantac drug.
I actually own all three of these stocks, and have topped up my positions this autumn. Moreover, all three possess defensive qualities that should help me through a recession.
