Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Results from two FTSE 100 companies this week came as a reminder of just how important the US economy has become to some ostensibly UK businesses. The share prices of both have moved up in fairly straight lines since the end of March, and are now comfortably above pre-pandemic levels1. Please remember past performance is not a reliable indicator of future returns.
Ashtead Group rents plant and specialist equipment to the construction industry. It started out in Ashtead in Surrey in 1947, but expanded vigorously in the 2000s into North America via a series of acquisitions. Today, it has operations spread across the UK and Canada, but the lion’s share of its sales – about 84% most recently – are conducted in America, effectively making it a US business2.
Ferguson, the plumbing and heating supplies distributor, continues to trade under its old name Wolseley in the UK. However, the Group, whose roots lie in the nineteenth century sheep shearing machinery business, changed its name to Ferguson three years ago to better reflect its largest division – Ferguson Enterprises in the US. America now accounts for 97% of the company’s underlying trading profits3.
Results announcements this week showed both companies navigating the Covid-19 pandemic with, if not aplomb, at least considerable resilience. Sales at Ashtead – whose Sunbelt Rentals division is designated an essential business – dipped by just 3% in the six months ending in October, while its earnings fell by a relatively miserly 7%4. Ferguson did even better in the three months to October, growing its revenues by 3.1% and trading profits by 12%5.
What Ashtead and Ferguson come as a timely reminder of – apart from the fact some FTSE 100 companies have performed substantially better than the index they are a part of in 2020 – is that investing in UK companies will more likely than not involve having an indirect exposure to foreign currencies, often the US dollar.
According to a fairly recent survey, around three quarters of the earnings of the UK’s top 100 listed companies come from overseas. Moreover, around two fifths of British companies now pay their dividends in dollars6.
This was a boon for some UK companies back in the spring, as international investors fled to the safety of the world’s number one reserve currency, thereby driving up its value.
However, a weaker dollar today means that UK companies with substantial operations in the US could start to see their earnings compressed, as the dollars they earn are translated back into pounds and the goods and services they provide become relatively more expensive to US consumers.
This though is only one part of the picture. The other, arguably more important part involves a weaker US dollar being very good news indeed for stock markets generally and for growth opportunities around the world.
Globally, the US dollar is seen as a safe haven currency – a place to go in times of economic and market stress. The dollar lived up to its billing earlier this year, particularly in March, as the true scale of the coronavirus pandemic became clear and the world moved into lockdown.
Since May, however, the US currency has been on a downward tack for a couple of reasons. First, the gap between US interest rates – which had been on a rising path in 2019 – and close-to-zero interest rates elsewhere in the world rapidly disappeared in March.
That reduced the desire among international investors to seek superior risk-adjusted returns from assets like US Treasuries. In fact they did the opposite, selling into the bond market rally accompanying the pandemic shock in large numbers7.
Second, markets, quite early on during the pandemic, began to look past 2020 to a widespread economic recovery in 2021. The advent of coronavirus vaccines last month has only validated that confidence. With investors less worried about what happens to economies this year, the focus has switched to where the best growth opportunities might appear over the next 12 months.
Neither factor is likely to change all that much over the months ahead, as the US Federal Reserve continues to seek to play its part in supporting the US economy and vaccines get rolled out around the world.
Emerging markets, in particular, ought to be beneficiaries of this. Not only have some – like China, South Korea, Taiwan and Vietnam – weathered the Covid storm considerably better than markets in the west, their growth outlooks are better too.
The other side of the pandemic, international fund flows could well continue to favour riskier assets in fast growing markets like these. The IMF thinks emerging markets will grow by 6% next year, outperforming the world’s developed economies by just over 2%6.
Businesses like Ashtead and Ferguson highlight the difficulties faced by investors aiming to limit foreign currency risks. Confining investments to your home market may well not do that. While using financial derivatives to filter out currency risks is possible, it is usually too complex and expensive in relation to the potential benefits involved.
The best approach may well be to embrace the upside and downside risks of currency movements and diversify your investments across a number of international markets. That way, the effects of any one currency suffering falls and having an impact on overall investment returns is much reduced.
The Fidelity Select 50 Balanced Fund provides a one-stop route to a broad markets and currency exposure. This fund invests in 30 or so other funds, mostly taken from Fidelity’s Select 50 list of favourite funds. Alongside a 31% weighting in the UK, this fund currently has large exposures to Europe (22%) the US (27%) Asia (9%) Japan (5%) and smaller positions in Australasia, Canada and Africa.
1 Bloomberg, 11.12.20
2,4 Ashtead Group, 08.12.20
3,5 Ferguson, 08.12.20
6 FTSE Russell, May 2017, and Link Asset Services Dividend Monitor, Q4 2019
6 IMF, December 2020
7 Reuters, 16.07.20
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. The Fidelity Select 50 Balanced Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. The Fidelity Select 50 Balanced fund investment policy means it invests mainly in units in collective investment schemes. There are just a few fixed limits for the three core elements in the fund. These are 30% to 70% for shares, 20% to 60% for bonds and 0% to 20% for cash. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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