The result of Britain's referendum on European Union membership may have come as a shock to a lot of people (probably including the new Foreign Secretary) but, in fairness, strategists did call the FTSE 100's relative strength in the aftermath of a leave vote.
Thanks to internationally diversified revenue streams many of the largest UK-listed companies had been touted as more solid investments than supposedly domestic-focused mid-caps. This, as argued in a recent Investors Chronicle editorial (IC, 15 July), is rather a sweeping generalisation, with many FTSE 250 (and indeed Aim) companies also conducting significant business overseas. Regardless of size, however, a commonly cited bull point for UK companies since the referendum has been whether they receive the majority of revenues in stronger overseas currencies, with special attention given to US dollar earnings.
At the most basic level, if a company sells its goods and services in one currency and banks its revenues in another, there will be a further gain or loss on the transaction depending on changes in the exchange rate. The transactional effect on profitability is amplified if costs are incurred and revenues received in weaker and stronger currencies, respectively. Thanks to this relationship, the low valuation of sterling could be favourable for the earnings of some companies and our stockpicking expert, Simon Thompson, has identified a number of opportunities since the Brexit vote (see 'Brexit: reality check', 28 June 2016). At the upper end of the capitalisation scale, many FTSE 100 companies have seen their share prices rise on the back of their proportionately high overseas earnings, but are they attractive simply because their profits are less dependent on UK growth or is there a currency benefit, too?