Weak pound’s silver lining to help FTSE 100

THE FTSE 100 has outperformed almost every major stock market in a turbulent year for share prices and may receive another boost from the struggling pound.

Last week, Bank of America warned the pound faced an “existential” crisis due to the economic slowdown, Brexit rows and questions around the Bank of England’s credibility.

Sterling has already fallen by 7.19 per cent against the US dollar this year, and 11.43 per cent measured over 12 months.

This is adding to the inflation crunch, by hiking the cost of imported goods, but the weaker UK currency has a silver lining.

Companies listed on the FTSE 100 generate more than three quarters of their earnings overseas, and these revenues are now worth more once translated back into sterling.

For example, plant hire specialist Ashtead Group generates 85 per cent of its sales in the US, while Shire Pharmaceuticals, cruise operator Carnival and publisher Pearson generate roughly two thirds of their revenues in dollars.

This partly explains why the FTSE 100 has avoided the worst of this year’s global share price crash, remaining in positive territory after climbing 0.37 per cent year to date to 7,532.95.

This compares to a drop of 14.72 per cent on the US S&P 500 index, and 24.50 per cent on the tech-heavy Nasdaq.

Interactive Investor’s head of investment Victoria Scholar said sterling weakness has boosted the FTSE 100, but that is not the only reason for its success. “The index is short on technology stocks, but has plenty of ‘value’ companies in the healthcare, pharmaceutical, financial and tobacco sectors.these have solid revenues and dividends and have been in demand.”

Stronger commodity prices have also boosted BP and Shell, as well as FTSE 100-listed mining giants such as Rio Tinto and Anglo American, said IG’S chief market analyst Chris Beauchamp. “Raw materials have been the foundation of the FTSE 100’s strength this year.”

The pound has also weakened as markets anticipate the Bank of England may slow its interest rate hikes to avert a recession.

Analysts expect four more increases of 0.25 per cent in June, August, September and November, which would lift the base rate from today’s 1 per cent to 2 per cent by year end.

If rates rise at a slower pace, the pound could strengthen, said Michael Rimmer, market strategist at Equals Money. “The Bank of England will determine the pound’s performance for the remainder of the year.”