CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved.

Trading Brexit ‘winners’ isn’t paying off

We look at why investors need to be careful while trying to pick firms based on currency movements alone.

British flag
Source: Bloomberg

The slump in the pound after Brexit vote meant that a number of big UK-listed companies saw their share prices rally over the summer of 2016. But, as sterling surges in the wake of the election announcement, it looks like the strategy of simply picking firms based on their currency exposure has run its course.

To take a few examples, international firms like Compass, Imperial Brands, Diageo, Reckitt Benckiser and Unilever all rose after 23 June, gaining an average of 10.7% until the beginning of October 2016. But since the snap general election was announced, the five have moved in the range between -2% and +4%.

The problem with the idea of trading firms based on their currency exposure is that it is an imperfect method. It makes sense, as a market narrative, to argue that most, if not all, of the gains in the FTSE 100 came due to the weakness in the pound following the Brexit vote. Yet, other stock markets gained, even if not to the same extent. Instead, it is more accurate to note that sterling weakness helped the FTSE 100 to a significant extent, but did not cause the rally by itself as investor positioning had become bearish before the Brexit vote, and when the world did not come to an end after the referendum, we saw investors return to the market.

In addition, currency moves affect different companies to different extents. And firms will also make sure to report changes in revenues and profits in both unadjusted and adjusted (i.e. taking into account the currency movement) terms, so that investors can see how the currency impact has affected their performance. Thus, assuming that firms with big international exposure will be automatic winners is not a prudent approach. Currencies are a two-way street, and operations in some countries will be more affected than in others, especially if a currency traded against sterling has weakened even more than the pound has.

Finally, currency is only one element in a company’s performance. A host of other factors come into play, including relative valuation versus others in the sector, earnings history, dividend payments and so on. Excluding these means that investors are not getting the full picture, and thus are running greater risks. Currency is certainly a factor to be considered, but it is not the be all and end all.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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