In early Monday trading, Sterling was down 0.4% at $1.2380, while the euro was up 0.2% at 90.255p. Comparably on Friday, the ‘Flash Crash’ during Asian trading saw the pound plummeted to a low of $1.1491 – it’s lowest since 1985.
How does this affect your shares? With speculators betting against the pound in recent weeks those companies that report in dollars are seeing benefits, whilst the reverse is true for those who report in pounds. Two companies that I have recently written about are testament to this HSBC and Easyjet. HSBC continues to see its share price rise towards my target price of £6.50, whilst Easyjet is dropping away from the target price of £12.50.
Easyjet are sacrificing revenue per seat to keep load factors high and to retain market share. It may be a case of seeing which low cost airline weathers the storm best with the pounds current valuation. Easyjet benefits from a significant hedging in the £:$ exchange rates which will assist in the short term, but this benefit loses impetuous as we move into late 2017 and beyond into 2018. The share offers a good buying opportunity if you believe the £ will recover by that time. That is of course a big if, and anyone’s guess, at present.
Whilst my target price for Easyjet remains unchanged and I am of the opinion this sell off is overdone. it is becoming apparent that the next two years will be turbulent for Easyjet (pun intended), and investors will need a firm stomach to handle the journey. Whilst I retain my buy recommendation for Easyjet, I would urge investors not to invest too big a percentage of their portfolio in this company.
On the other side of the coin, investors in HSBC will remain happy at the fact their dividend is paid in dollars, whilst the bank UK operations makes up a small portion of its activity. Arguably the good outweighs the bad, and the market seems to agree as HSBC is today up 5p to 624gpx.
But what of the pound itself? Where the pound will end up remains open to speculation. Alexandra Russell-Oliver, foreign exchange analyst at Caxton, estimates that the pound could head towards the $1.15 range by the end of 2017, as reported today by the BBC. However, whilst she has predicted that the bank of England will cut interest rates again, I am of the opinion that the base rate will remain where it is for the time being as a cut would have very limited value as banks are likely to not pass on further rate cuts, and shown in August when they were slow (and in some cases they still haven’t) passed on the benefit to borrowers. Controversially, I believe interest rates may rise next year to shore up the value of the pound should it take much more of a hit. The major effect of the pounds devaluation on retail prices will take time to filter through the system as large retailers have hedging positions in currency movements. The more immediate impact will be felt through petrol prices, which are prone to change far quicker and as we know, higher fuel prices means higher transport costs, meaning inflationary pressure builds. On that note, Oil has today touched $52.60 a barrel, compounding the case for potential fuel price rises over the coming weeks.
What Company do you want Risky Bear to research and report on next?
Whilst I intend to researching companies in my own time and in an order determined by news and events, I am more than happy to take requests from readers. If you wish me to research a particular company, let me know via the contact page.