The British Mid-Caps Earning Big Dollars
FOREX.com | Jul 22, 2016 08:18
The FTSE 250 index has recouped almost all Brexit vote losses as the pound rises off 30-year lows, though if the pound relapses, some middleweight shares will hold on to gains better than others.
For now, FTSE 250 mid-caps are having their best run since a 14% two-day fall in the wake of the Brexit vote.
Sterling’s bounce is the most obvious reason for the broad rally. Almost 60% of FTSE 250 company sales were in sterling last year vs. 22% of FTSE 100 sales, according to .
So, sterling’s 3% rise against the dollar from thirty year lows earlier this month, recharged last week by the Bank of England’s (BoE) decision not to ease, has helped the mid-cap index recoup almost all of its post Brexit loss.
It has even begun to slightly outpace the dollar-fuelled FTSE 100.
As for the pound, it has strengthened on a string of better-than-expected economic readings, though most were from before the referendum. Resilient US economic data have helped propel the dollar well above early-July lows too, making the pound’s recovery less than streamlined.
The BoE’s next meeting looming just a fortnight away is also cautionary. The Bank said last week it was likely to deliver stimulus, possibly as a "package of measures".
We think the higher probability of BoE easing will reinstate investors’ recent bias for companies with most costs in sterling and sales largely in foreign currencies. The preference partly explains why the FTSE 100 outperformed all major stock indices in the fortnight following 27th June.
FTSE 250 companies with more regionally diverse sales should outperform too, though there’s a risk they will again be caught up in an indiscriminate sell-off of mid-sized shares like last month’s, if the Bank starts easing.
More positively, sterling’s weak condition is an opportunity to pick up stocks with better chances of outperforming, due to loose ties to sterling.
Not all are large caps.
Smaller miners and oil companies are the most obvious, as all do business in dollars, though risk-averse investors will run for the hills from many of these.
Most that survived commodity price routs are highly indebted and unprofitable and have scrapped dividends.
Ironically the risk-reward balance in Acacia, Centamin, Fresnilo, platinum producer Lonmin (LON:LMI), and Petra Diamonds (LON:PDL) is now less attractive after surges of 35%-190% in 2016.
Get The App
Shares which are accelerating but which have not yet to recovered last year’s losses—Anglo, Glencore (LON:GLEN), Lonmin—may attract the brave.
Either way, these groups will still preserve price gains better than sterling-focused stocks so long as the dollar remains at multi-year highs against the pound.
Remaining SME mining stock opportunities will be found among those that have rallied least, though laggards trail the sector for sound reason. Like exposure to metals with less than sparkling price recoveries, or too-slow debt reduction.
(See copper miner Kaz Minerals whose net debt is 14 times forecast core earnings).
There are even fewer choices among mid-sized oil groups. Excluding the majors leaves only Tullow and Cairn. The rest are in more perilous FTSE SmallCap and AIM waters.
Almost all are running cash deficits and negative operating margins too.
Oil services firms Amec Foster Wheeler and John Wood Group are rare dividend payers. Premier Oil (LON:PMO) and Tullow are among the more solid explorers. Premier is saving millions of dollars whilst bringing new North Sea fields on stream in sterling.
Tullow is expecting a $500m insurance payout and its large TEN fields project, offshore Ghana, starts production within weeks.
A handful of FTSE 250 shares outside of the energy sector, have significant dollar exposure that’s less easy to spot.
Transport group Stagecoach and Tate & Lyle (LON:TATE) are the household names among these.
Stagecoach’s US business contributed $552m of sales in its last financial year; Tate’s US arm generated 78% of revenue worth around $2.4bn.
Engineer Meggitt (LON:MGGT), business publisher UBM and packaging group DS Smith also come out top among FTSE 250 shares, on dividends, cash in the bank, and debt.
"Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.
Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions."
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.