Three sectors that might benefit from the post-election surge in sterling

“The pound’s surge to a 19-month high against the dollar at around $1.35 and a three-year peak against the euro north of €1.20 is grabbing all of the post-election headlines but sterling’s gains are also putting a bit of a lid on the FTSE 100,” says Russ Mould, AJ Bell Investment Director.

“A strong pound decreases the value of the overseas profits generated by the multinationals of the FTSE 100 once they are translated back into sterling but a rising British currency could be well received by three stock market sectors in particular.

“They are General Retailers, Food Retailers and Travel and Leisure – and this helps to explain why International Consolidated Airlines, Next, TUI, Dixons Carphone and Associated British Foods are all prominent risers in early trade.

“This is because a strong pound may cap imported raw material costs for them and also tamp down inflation more generally, putting more money in consumers’ pockets on a real-term, post-inflation basis.

“In addition, a perky pound means it is cheaper to travel abroad than would have otherwise been the case, something which could benefit tour operators and travel agents.

“This is not to say that all of the challenges which face these sectors or their constituents will immediately melt away.

“Retailers must still be able to provide the right product at the right price and via the right distribution channels to succeed, to keep stock turn high and markdowns low, while the key players in the Food Retail sector must still confront the rise of the discounters.

“Within Travel & Leisure, the bookies are coming under ever-greater regulatory scrutiny and paying ever-higher levies and taxes, while the tour operator business is fiercely competitive and one where online disruptors are increasingly making their presence felt. Airlines may even face the most volatile environment of all, as they juggle EU open skies rules in a post-Brexit world, ferocious competition, the marked absence of customer brand loyalty and how movements in the oil price affect their cost base.

“Yet some firms are rising to these challenges and overcoming or even benefitting from them – such as Next and easyJet – and in many cases their shares are cheap on an earnings or yield basis after a period of marked underperformance.

“Since the EU referendum vote in June 2016, the FTSE 100 is up 15% and the FSTE 250 by 20%, while the General Retailers sector is down by 15%, Travel & Leisure up by 5% and Food Retail up by 47% (thanks largely to the rise and rise of Ocado).

Performance of general retailers

Performance of general retailers

Source: Refinitiv data

Performance of food retailers

Performance of food retailers

Source: Refinitiv data

Performance of travel and leisure businesses

Performance of travel and leisure businesses

Source: Refinitiv data

These articles are for information purposes only and are not a personal recommendation or advice.


The chart of the week is written by Russ Mould, AJ Bell’s Investment Director and his team.