MINOR INVESTOR: If the pound keeps falling the FTSE 100 could hit 7,700, says Richard Buxton - crazy as that may sound
A curious thing happened to the UK stock market this week - the FTSE 100 almost beat its record closing high.
Beating a previous high is not an unusual phenomenon for a stock market index. However, for those of us who spent 15 long years waiting for the Footsie to regain its 1999 peak, a tilt at a new record just a year-and-a-half after the last one felt odd indeed.
In the end, Tuesday’s excitement (exciting for us finance geeks at least) fizzled out. The FTSE 100 took a shot at its 27 April 2015 record close of 7,103.9 and then slunk back to close at 7,074.3.
Nonetheless, a new record could be delivered imminently.
As the pound has sunk since the Brexit vote the FTSE 100 has headed up
So what’s going on here? A mini-stock market boom wasn’t in the vote for Brexit script.
The key to the upturn in fortune for the FTSE 100 isn’t that stuff doesn’t look as bad as the pessimists forecast – although this is helping.
The main reason is that the pound has sunk.
‘At the moment, to be honest, it’s very, very simple, it’s all about the currency’, said veteran fund manager Richard Buxton, when I interviewed him for the next episode of the Investing Show this week.
‘Because of the preponderance of multi-nationals, big dollar-earning companies, it’s just straight translation into profit upgrades,’ the chief executive of Old Mutual Global Investors and UK Alpha fund manager said.
‘If you look at the Footsie in dollar terms it’s absolutely flat, but in sterling terms we are just going up as the currency gets weaker.’
Mr Buxton was, in fact, being a little kind to the FTSE 100 there, as despite it having put in an impressive 11% rise since EU referendum day, the pound has slumped 14% against the dollar.
In dollar terms we’re slightly down, but the effect he points to is one investors should heed.
Mr Buxton says he is looking to the big blue chips that earn plenty of money overseas to profit from this trend, while also continuing to hunt for shares that are undervalued by the market, such as banks and financials.
Our weak currency boosts the earnings of London-listed companies with international profits that are now worth more in pounds and pence thanks to sterling's decline.
Interestingly, though, despite the fact that it also makes UK firms' shares cheaper for overseas investors to buy, Mr Buxton said there’s been no evidence so far of a big rush of foreign fund managers buying in.
That indicates they may feel the pound has further to fall. If it does, the FTSE 100 could keep rising if the current trend continues, said Mr Buxton.
‘If sterling suddenly goes to 1.15 to the dollar, that’ll be 7,700 on the Footsie, if it just follows,' he said.
'We’re all sitting here laughing, going that seems crazy, but…’
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