The FTSE 100 has had it rough of late. The UK’s main index dipped below 7,000 two days ago, capping off a slide that began in mid-August. This is the second time this year that this level has been breached. On four other occasions, the index came close. On all occasions, it eventually rebounded, and it may well do so this time. The FTSE 100 closed back above 7,000 points yesterday. But, it has slipped again today.
Last week’s mini-budget rattled the UK markets. Tax cuts mean less government revenue, which it needs to fund its spending plans, so it will have to borrow. The trouble is the UK’s debt pile is relatively high already. The government bond market did not like the plans, and yields spiked.
UK Interest rates had already been raised to combat inflation. They will probably have to be raised higher and quicker to prop up the pound, which was already in a slump but sold off quickly after the budget was announced. That will make imports more expensive, fuelling inflation, which might put upward pressure on rates and…I could go on.
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Suffice it to say, the UK economy is in a bit of a tricky spot, to put it mildly.
FTSE 100 versus FTSE 250
Investing in FTSE 100 stocks might seem like a recipe for disaster. However, it could be worse. The FTSE 250 has suffered even more. That’s a clue as to what investors are thinking. FTSE 250 companies tend to be more exposed to the UK economy and get more of their revenues in pounds.
FTSE 100 companies tend to be multinationals. They have broader revenue sources. A weak pound might be good for companies that report in it but get a chunk of their revenues in the currency of other economies, particularly the US dollar.
Fist-full of dollars
Equipment rental company Ashtead has a large US business. So does credit checking firm Experian. International distribution and services company Bunzl is another company with hefty exposure outside the UK. These three pay their dividends in pounds. Paying dividends should be more manageable if their foreign revenues hold up and are translated into greater amounts of pounds, so long as it stays weak.
The miners and the oil & gas companies might also be good buys in the current environment. Oil and mining products are typically priced in US dollars. So, the likes of BP and Anglo American might seem like solid choices, and they might well be. Their businesses are global and not wholly reliant on the UK economy. Their share prices might hold up better than others, assuming their other places of business are doing well economically. However, these companies declare their dividends in dollars and cents. So, although dollar dividends might hold up, the amount hitting investors’ accounts in pounds and pence could be disappointing.
The current situation could change. Here at the Fool UK, we invest for the long term. So although I would still buy these five FTSE 100 stocks right now, that they seem well positioned for a weak pound is a bonus. I am also confident that including them in my Stocks and Shares ISA makes sense in the coming years, not just days and months.
