Ever since the U.K. government announced its so-called “mini-budget,” markets in London have been gripped by turmoil. The chaos driven by recent political events has seen sterling tank to new historic lows against the dollar as many overseas investors pulled out of the country. The sell-off in the U.K.’s currency has meant some money managers are beginning to find value in select sectors of the British stock market. Here’s what they’re talking about: Diageo The maker of Captain Morgan spiced rum and Johnnie Walker whisky is one stock that stands to benefit from the fall in sterling, according to Freddie Lait, co-founder and chief executive of Latitude Investment Management. The fund manager believes sterling’s devaluation over the past few weeks has yet to feed into the stock prices of companies earning much of their revenue in U.S. dollars. “We’ve run the numbers and push them through our models,” the former Goldman Sachs analyst said. Such non-U.S. listed dollar earners are likely to benefit “to the tune of 10 to 15% on spot prices,” according to Lait. Lait also said a weaker sterling would also “cushion” any fall in earnings the London-headquartered company may report in the near future. Shares of the multinational company have risen by 30% since the start of 2021 and continue to trade near their all-time high. FTSE 100 The index of the 100 largest London-listed companies is one to target when looking for the U.K.’s dollar earners, according to Alan Custis, head of equities at Lazard Asset Management. He said: “75% of their revenues are generated outside of the U.K. So, a weak sterling actually does help them in terms of the translated profits.” The index, known for its high-divided yielding mining stocks and oil and gas firms, is also likely to remain attractive despite rising government bond yields. As the interest rate on long-term U.K. government debt has risen above 4%, yield-hunting investors have traditionally flocked to the safer asset by dumping stocks, which are higher risk. “Fortunately, 45% of the dividends paid by FTSE100 companies are actually tied in dollars,” Custis, who is also a portfolio manager, said. Homebuilders If interest rates rise to 6% it will be very difficult for real estate stocks to look attractive, according to Custis. But at the current rate of 2.25%, he believes they are starting to look undervalued. “Real estate stocks are obviously discounting quite a lot of bad news,” he said. “On average, the commercial real-estate stocks in the U.K. are trading at about a 40% discount to net asset value, which is when you look back in history, one of the widest levels.” However, Bhanu Baweja, chief strategist for UBS Investment Bank, believes that although the sector looks attractive, it might be too soon to buy. He added: “Although it is getting cheap, particularly some sectors like homebuilders and, and banks are getting cheap. It’s a little bit early to get into that market.”
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