Wed, Oct 05, 2016 page10

• FTSE 100 rally brings no joy to foreign investors

  NEWCOMERs’ DELIGHT? Market analyst Ken Odeluga said weakness in the British pound was only good for US investors if they were new to FTSE 100 companies

  • Bloomberg
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  As prospects of Brexit firm up, a fresh weakening in the British pound is pushing the FTSE 100 Index of UK megacaps close to a record. Not that foreign investors, who own more than half the nation’s equities, are rejoicing.

  While the British equity benchmark has surged 12 percent this year in local currency, it has declined more than 2 percent in US dollar terms, the biggest underperformance since the global financial crisis.

  Exporters advanced on Monday as the pound tumbled after British Prime Minister Theresa May said she would start the process of withdrawing the UK from the EU by March next year.

  FTSE 100 futures yesterday traded higher at 7:52am in London as the currency sank to its weakest since 1985.

  Local investors have seen the value of their holdings increase as companies, including drugmaker AstraZeneca PLC and whiskey company Diageo PLC — which get most of their revenue outside the UK — rallied after June’s exit vote sent the pound tumbling. Remove the currency halo, and the FTSE 100 is still below the level it was at before the decision. That is bad news for overseas investors, if they have not hedged to account for the sterling effect.

  ‘MIXED BLESSING’

  North America accounts for 46 percent of all foreign holdings, according to the latest British government report published in September last year.

  “On one hand, for UK-based investors, it’s been quite the boon; on the other, if you are a US investor, it’s been more of a mixed blessing,” said Ken Odeluga, a London-based market analyst at brokerage City Index. “If you have your British holdings in dollars, you are actually going to get far, far less than you would have if we didn’t have this strong weakness in the pound.”

  UK shares have become Europe’s highlight this year as firms from JPMorgan Chase & Co to HSBC Holdings PLC recommended buying the stocks, citing the weaker pound and increased stimulus from the Bank of England.

  While analysts raised their estimates for profit growth in the aftermath of the vote and economic data have been better than expected, earnings for FTSE 100 companies are still projected to contract 3.2 percent this year.

  BRIEF RESPITE

  Although the inverse link between the pound and the FTSE 100 had begun to break down at the start of last month, the respite was brief.

  May’s pledge to invoke the formal trigger for two years of Brexit talks raised doubts about what form the exit will take and the kind of subsequent trade deal struck. That, coupled with speculation that Britain will favor immigration control over safeguarding access to the single market, prompted fresh declines in the pound on Monday. The FTSE 100 closed within 1.7 percent of a record reached in April last year.

  Foreign holdings of British equities have grown over time. They stood at 54 percent at the end of 2014, the latest year with data available from the British Office for National Statistics, versus just 31 percent in 1998.

  Investors owning the country’s shares in greenbacks have suffered more than local ones in the past three years and the biggest US exchange-traded fund tracking the shares has seen outflows almost every month this year. Since the day of the referendum, the FTSE 100 has gained 10 percent in local currency, versus a slide of more than 4 percent in US dollar terms.

  “Given the pound weakness right now, for US investors, it’s really only a win if you are a new investor and you’re bullish,” Odeluga said.

  “If you already own FTSE 100 companies, you’ve seen your investments depreciate,” Odeluga said.
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