There’s been lots of anger, confusion and heartburn. I want to park that today. I want to talk about the winners from Brexit.
Winners from a cheap pound
Brexit – what has it actually done? Well first and foremost, it’s smashed the pound. The pound is down 10% versus the dollar to the lowest level since 1985. And there might well be more to come. If and when “article 50” is invoked, which starts the clock on a formal exit from the EU, expect the pound to fall further. Depending on how the divorce goes, it could fall some more again.
That’s bad news for most people, since most of the stuff we buy comes from overseas. But for a small band of exporting companies, it’s fantastic news. Stuff that’s made in Britain just got a 10% price cut, making it more competitive on overseas markets.
That’s the reason why the FTSE 100 has taken the news relatively well, compared to the FTSE 250, the pound, or European stock markets. The FTSE 100 contains many large international companies – around 50% of profits made by FTSE 100 companies are made overseas. So the overall FTSE 100 index is comprised of UK focused companies which have taken a big hit, and foreign focused companies which are doing just fine.
Let’s say you think sterling will fall further, after the divorce really gets going, and you want to go shopping for UK exporters. What should you be looking for?
Well, it’s important to understand that a company’s costs matter as much as its revenues. If a company sells lots of products overseas but its costs are denominated in foreign currencies too, it’s not going to benefit much from the cheaper pound.
What you’re looking for is a company which makes things here in Britain and sells them overseas. There are rich pickings among specialist engineering companies. Rolls Royce is the biggest and most obvious example. Or Burberry, which stitches coats in the UK for sale in Shanghai.
And there’s another factor in this: overseas investors. UK companies have just gotten a lot cheaper for foreign investors. Expect more mergers and acquisitions deals, with foreign companies gobbling up UK multinationals on the cheap.
I’ve just gotten off the phone with the CEO of a newly listed British technology company which is part of my Penny Share Letter portfolio. His business has spent the last eight years developing a product here in the UK and is now on the way to launching it in the North American market. In the company’s most recent interim results it was able to increase North American sales by 76% on the same period last year. Brexit is great news for him and his company.
I’m learning that there are hundreds of quality small companies just like the one I just described. I’m busy designing a new stock screen to help me choose among them. There are some rich pickings to be had…
When all else fails, you should own…
I’ve just finished up a piece for broadcast tomorrow, on what Brexit means for the British and world economy. When I came to the final “what should we do now” section, I must admit I was stuck.
Because, as I’ll show you tomorrow, there is a potential solution to a lot of the chaos. But the thing is, I’m not sure it’s going to happen. I don’t think our leaders are smart or coordinated enough to do what needs doing.
That would not be good news for the world economy. People would suffer. But those who saw it coming, and took steps to protect themselves, well, they could do spectacularly well.
Basically it comes down to this: a recession is good news for gold. And good news for gold is great news for gold miners, which are a sort of leveraged play on the gold price.
If the divorce from the EU is messy, and if other EU members start agitating for votes of their own, I really think you want to own gold miners.
A colleague of mine has been preparing for this for a while. He’s developing a new service to show readers how to invest in the right kind of gold miners. The wraps come off it later this week. Keep an eye out.