Don’t get caught in the stockmarket doldrums

Exponential Investor’s philosophy is to focus on extraordinary opportunities that can deliver life-changing investment gains.

By exposing some small part of your capital to these opportunities, your overall investment performance can radically improve.

But there’s still that other chunk of your portfolio. Where you hold blue chip UK stocks. Because that’s just what we all do, right?

With your regular editor Nick O’Connor on leave today, I want to warn you about a change in the way the overall UK stockmarket behaves.

My worry is that the wind and tide which floated the UK stockmarket’s boats is about to change direction. And nobody is thinking through the implications.

I’ve seen the implications first hand. Metaphorically speaking…

I used to work at a holiday resort in Thailand. The sort that had many activities. Watersports being the most intriguing. For the staff…

Every day, dozens of holidaymakers from countries like France, Australia, South Korea, Japan and China would hit the waves on catamarans, stand-up-paddleboards and windsurfing boards.

Few made it back without help. Things got so bad that windsurfing was eventually taken off the menu.

The humiliating mistake our guests would make was simple. It’s easy to sail, paddle and surf with the wind and tide at your back. So that’s naturally what people do when they first set off. But this just builds up a deficit of time and effort it’s going to take to get back.

Of course, the less experienced you are, the bigger the mistake you make.

Like the students at Oxford University who wait for punters to plunge in, we used to sit on the beach and wait for the inevitable. A sudden double take from the water sports enthusiast, when they realised they were sitting in the water in front of the wrong hotel, having drifted hundreds of metres.

Then we’d applaud the efforts of our watersports team, dragging people along the beach in knee-deep water, back to where they started from. The best bit was when the staff had to encourage the embarrassed participant to try again…

I’m predicting much the same thing will happen to British investors in the UK stockmarket. Without the watersports team’s help to get back to where they started from…

Here’s what I mean. The British stockmarket is packed full of foreign companies with foreign earnings. They list on our stockmarket for a long list of reasons not worth going into here.

This means a UK investor who buys into the standard stockmarket index, the FTSE 100, doesn’t buy British companies. They buy international ones, with earnings and expenses across the globe.

That’s supposed to be good news. It means you can get global exposure right here at home. No additional expenses or currency risk.

Ah, but that’s the big mistake. The currency risk. It’s the tide and wind that’s about to reverse because of Brexit.

For decades, a falling pound has pushed up the UK’s stockmarket prices. When the pound falls, it makes UK-listed companies’ foreign earnings worth more in terms of pounds. And so their shares go up. That’s the history of the past few decades.

After the Brexit referendum, which was expected to unleash economic Armageddon on the UK, the FTSE 100 rose.

Why? Not because Brexit is good news.

It was because our FTSE 100 contains so many foreign stocks. Those stocks’ UK share prices are more affected by the pound than Brexit changes in the British economy.

So the pound and the UK stockmarket index often move in opposite directions. Something that isn’t true in many places.

But the implications of this are something most UK investors haven’t fully grasped.

Think about it like this: what if the UK’s economy does well and the pound goes up?

Then our FTSE 100 stockmarket index will likely go down, or underperform.

That’s bizarre. Our stockmarket index is harmed by good prospects for Britain…

It means that, if you’re optimistic about Britain, you shouldn’t buy UK stocks… at least, not the FTSE 100…

But there’s good news too. For Exponential Investor readers and Brexit believers alike. You can opt out, or profit from, the pound’s moves.

If you believe in the UK’s future, and the pound going up, you just need to pick and choose which stocks to invest in more carefully.

Smaller companies focusing on innovation are less exposed to the pound. The sorts of investments Nick O’Connor writes about here at Exponential Investor.

And, for believers in the British economy, UK-focused companies can be found on our exchange too.

You just need to look at what you’re buying, and what you already own. Just as you need to check the direction of the wind and tide before going into the ocean.

How many of the companies in your portfolio would struggle under a rising pound?

Which companies should you invest in instead?

These are the questions I answered in my Brexit Boom Portfolio monthly issue of Zero Hour Alert.

If you’d like to see what to buy and what to sell, click here.

Until next time,

Nick Hubble
Editor, Southbank Investment Research

Category: Commodities

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