PA ANALYSIS: Should you be topping up UK equities?

Added 14th November 2016

As another busy week for British company results kicks off it could be a good time to take the plunge on raising a United Kingdom equities allocation.

PA ANALYSIS: Should you be topping up UK equities?

While the golden opportunity to top-up presented by the Brexit vote panic on 24th June has long since passed, adding some weight to this holding could still prove fruitful.

A key factor on which such an argument may be built is the lower level the pound has settled around.  This automatically makes all sales made overseas by British companies more valuable when converted into home currency.

The other side of the coin in terms of the benefits a lower pound can bring is making UK goods and services more competitively priced relative to rival offerings from other countries, which helps lift market share.

According to the November FTSE 350 ‘Profit Watch’ report from The Share Centre, the pound is trading at a 185 year low on a trade-weighted basis. The effect this has had on company revenues has barely begun to hit home in results statements due to the considerable time lag between making sales and reporting to the market. The Share Centre’s analysts say it will take a year or more to see the full effect and as many companies have hedging contracts that will mitigate their exposure for several months yet.

Consensus forecasts have sterling staying lower than its pre-referendum level for a considerable time yet, and therefore overseas earnings seem set to make a bigger impact on company profits for some time to come.

"The effect this has had on company revenues has barely begun to hit home in results statements due to the considerable time lag between making sales and reporting to the market"

The report also says that two-thirds of companies have reported rising sales, up 9.1% overall when the beleaguered BHP Billiton is excluded. UK plc operating profit is up 7.4% overall, although the Share Centre noted that margins are being squeezed for three-fifths of companies.

Domestic economic indicators have remained relatively robust since the referendum, so even domestic facing companies which do not benefit from the weaker pound could deliver good numbers next year in many cases. A good example came this morning in the form of housebuilder Taylor Wimpey which saw its shares jump over 3% as it reported a healthy order book and upgraded profit forecasts.   

Another thing the Profit Watch report points out as a reason to be bullish on FTSE 350 stocks is that there have been signs of recovery in energy and commodities, which feature heavily among the UK’s biggest listed companies. A recovery in demand coupled with the lower pound could put some serious wind in the sales of UK plc over the coming year or two.

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About Author

Alex Sebastian

News editor

Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.

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