There are few things investors like more than a good ‘theme’, which is why so many have seized upon the recent weakness of sterling as a reason to buy into companies that generate a significant amount of their earnings overseas. So is this not only yet another nail in the coffin of domestic UK companies but also a headache for those, such as The Value Perspective, who – because of their attractively low valuations – have higher exposures to more domestically oriented companies?
Regular visitors to The Value Perspective will not be surprised by our answer to that, which is ‘not necessarily’. The important thing to remember here is currencies are incredibly hard to forecast. Anyone who thinks working out what is going to happen to companies’ profits is tough should try guessing where the dollar, yen or euro are heading next.
That being the case, investors should not be too confident we have heard the death knell for all companies that generate a greater proportion of their profits within the UK. But can we go further still? Is it possible to conceive of an environment where having large proportions of your profits coming from overseas could be a bad idea and the UK might suddenly be seen as something of a safe haven?
Relative to the euro, that is perhaps not too much of a stretch for most people but versus the dollar or any other leading currency it is a bit harder to picture. Nevertheless, in this sort of exercise, it is always worth asking yourself how easy it would have been for anyone back in 2006 to believe the world was just around the corner from a global financial crisis. Not very easy at all.
Again, if I asked you for your view on the chances that, over the next five years, emerging market growth actually turned out to be hugely disappointing relative to UK growth, you might well say they were very low indeed. History, however, suggests the chances could well be a lot higher than most people would think.
An interesting little snapshot of the dangers of failing to keep an open mind about macroeconomic issues came in June last year when Brazil’s finance minister Guido Mantega described Credit Suisse’s lowering of its growth forecast for his country as a “joke”.
Just three months later Brazil’s Central Bank was agreeing with the investment bank’s downbeat assessment. Regardless of what politicians might be able to get away with, however, investors should look to avoid putting themselves in a position where their portfolio is a one-way bet.
With sterling as weak as it is at present, many people might very well counsel buying overseas companies in order to benefit and yet we would argue there is a huge attraction to being the other side of such trades. Of course, when it comes to the uncertainties of foreign exchange, market volatility and so forth, we as ever rely on our normal style of valuation investing.