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Drug companies among the winners from falling pound

Investors are urgently evaluating their portfolios in light of the slide in sterling and the outbreak of 'currency wars' around the world.

 
Drug companies among the winners from falling pound

Investors are eyeballing their portfolios for stocks sensitive to big currency movements as the pound comes under attack, and as ‘currency wars’ pervade financial markets.

Globally, nations are attempting to devalue their currencies to gain a competitive advantage, with policymakers in the UK and Japan among the most outspoken about their intentions to keep their currencies low, which would help exporters.

In the UK, the pound has fallen hard so far in 2013, amid growing concerns about the UK economy, exacerbated by last Friday’s weak GDP data. The UK's economic weakness has been thrust further into the spotlight as fears over the eurozone, US and China have diminished, while comments from incoming Bank of England governor Mark Carney that economic stimulus by central banks around the world hadn't been 'maxed out' only exacerbated the fall this week.

‘Everything, all the data, is coming in bad, there is pressure on the deficit target, and a looming threat that we are going to see a credit downgrade in the next few months,’ says William Poole of FC Exchange.

Currency movements are difficult to predict, but there are few forecasters who predict anything but further depreciation for sterling in the coming months.

Pound boon for international blue chips

Fund managers investing in UK blue chips are generally upbeat about the impact of a falling pound, as many of the strongest companies are those making money overseas.

Carl Stick, a Citywire AA-rated fund manager at Rathbone, counts ‘competitive devaluation’, among the biggest risks facing equity markets. However, he says the individual holdings in his Rathbone Income fund should benefit from a decline in the pound.

‘At the moment, I think we benefit from sterling being weaker. Businesses that pay dividends in dollars, pharmas for example, should benefit from a weaker sterling there’. GlaxoSmithKline (GSK.L) is Stick’s biggest holding, comprising 6% of the £484 million fund. Besides the benefit from sterling weakness, GSK’s dividend is secure and likely to grow, Stick says.

Another UK equity income fund manager, Fidelity's Michael Clark, is similarly upbeat. 'Most of the companies we invest in, although listed in the UK, have a global business,' says the Citywire A-rated manager of the Fidelity MoneyBuilder Dividend and Enhanced Income funds. He too highlights the benefits to GlaxoSmithKline and competitor AstraZeneca (AZN.L).

'Pure domestic companies in the portfolio are limited to regulated utilities. But generally as long as it's not too severe, the weakness of the pound is good for us,' Clark adds.

GSK also features among shares that could benefit from a weak pound highlighted in analysis by French bank Societe Generale. Others include IMI (IMI.L), Kingfisher (KGF.L), Aviva (AV.L), Intertek (ITRK.L), Vodafone (VOD.L) and Sage (SGE.L).

Shore Capital analyst Gerard Lane reckons sterling remains overvalued by some 20%. The stockbroker has produced a list of shares likely to benefit from a weak pound, highlighting those companies with ‘a cost base located in the UK that is disproportionately larger than their revenue exposure,’ at the expense of consumer facing companies.

Beneficiaries from lower sterling, according to Shore Capital:

Micro Focus

Jardine Lloyd Thompson

Fidessa Group

Sage Group

Intertek group

Ricardo

Aveva group

Arm Holdings

Sdl

Braemar Shipping Svs.

Imagination Technologies

Renishaw

Victrex

Meggitt

Invensys

Cobham

Smiths Group

Consort Medical

IMI

Informa

Sepura

Astrazeneca

Vesuvius

Aegis Group

Qinetiq Group

Ultra Electronics Hdg.

Spectris

UBM

Wood Group (john)

Rolls-Royce holdings

Laird

WPP

Bodycote

Spirent Communications

Dollar gains

Other investors are preparing for a strengthening US dollar. Sanjeev Shah, the manager of the Fidelity Special Situations fund who describes himself as a ‘dollar bull’, said: ‘There are a lot of stocks in my portfolio which are dollar beneficiaries, like BP, GSK and Electra.’

Societe Generale notes that UK-listed stocks with a high dollar exposure include Reed Elsevier, Pearson, HSBC, Standard Chartered, Aegon, Prudential and Vodafone, while ‘resource sectors are obvious beneficiaries’.

Japanese yen devaluation

In Japan, where UK investors tend to pick funds rather than individual shares, attempts to devalue the yen have helped currency-hedged funds outperform their rivals recently. Read more here.

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