Weak pound 'is boost for companies based in UK'

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The Independent Online

A weak pound benefits UK companies and boosts shares prices on the London Stock Exchange, it has been claimed.

Old Mutual Global Investors, the City fund manager which controls £14bn of client funds, said sterling's downward trend was helping the growing number of companies that now look overseas for growth.

Richard Watts, manager of Old Mutual's UK Mid Cap fund, said: "It has often been the case that the best place to access growth in international markets is the UK. It may seem counter-intuitive, but the key is in the overseas earnings characteristic of UK businesses – around 60 per cent by our estimate in the mid-cap area.

"This implies that the fall in sterling will boost UK equities. The data seem to bear this out. As at 19 March, sterling was down nearly 10 per cent against the euro since beginning its decline on 24 July 2012. In the same period, the FTSE 250 rose 32 per cent.

"UK equities provide a natural hedge against a fall in sterling. Overall international earnings in the UK equity market are around 80 per cent, so that when the pound falls the sterling-accounted earnings of UK companies rise. The same benefit can be captured by allocating to overseas equities, but in the current environment UK businesses offer significant additional benefits, including robust balance sheets, attractive dividend yields, lower volatility and robust governance."

In a note to clients, seen by The Independent, Mr Watts cites Ashtead and Invensys as good examples of this. Both companies have benefited from the falling pound.

Ashtead, which hires equipment to the construction sector, has grown in the US, while the engineering group Invensys has benefited in Asia.

Torben Kaaber, chief executive of Saxo Capital Markets, said the pound is likely to continue on a downward trend.

"The downward slope [of the euro] is likely to be mirrored by sterling," he said. "The UK is clearly regarded as the nearest domino to fall if the eurozone problems worsen and we see a strong possibility that the pound could fall to 1.40 to 1.425 against the dollar in the near term."