“The UK is a must avoid. High debt with the potential to devalue its currency present high risks.”
- Bill Gross, Fund Manager, Pimco, quoted on Reuters, Tuesday
And it gets worse. Read this…
“Growth is slow and inflation is rising, and weakness of the exchange rate has to happen. We are massively bearish on the pound.”
- Hans Redeker, Head of FX, BNP Paribas, speaking to Bloomberg, yesterday
I could go on with the quotes, but you get the picture.
The City hates UK PLC and a sell-off looms for the pound.
Yesterday’s GDP numbers hardly helped matters. With official growth of 0.1%, the currency and bond markets were volatile.
At least we’re out of recession though, right? I’m not so sure. Not to split hairs, but recessions are defined as two consecutive quarters of economic contraction. Surely recoveries should follow the same prudent guidelines. So while HM Treasury may celebrate, I reserve my judgement until we’ve seen another three months of expansion.
Given this wobbly backdrop, it’s just as well that we have prepared. In last week’s piece we discussed how to play sterling’s slide. This week we have an even more aggressive way to profit from the pound’s plight.
The power of the foreign currency translation effect
We’ve already discussed looking at UK based stocks with US income.
Specifically, we suggested Diageo (DGE:LN), Sage (SGE:LN) and National Grid (NG:LN). It’s no surprise that with the pound floundering, each one of these stocks is outperforming the sliding FTSE 100 index since our call.
This time around, I’ve got a unique strategy that you may never have seen before. One way to beat currency devaluation is to intentionally expose your portfolio to currency risk. We believe that we’ve found a reliable, low-risk way to make the risks of investing in foreign shares work for us.
It’s something we’ve done before to great effect in my newsletter, The Fleet Street Letter. In 2008, we held a stock called Société des Bains de Mer (BAIN: FP). We sold it for a profit of 48%. But that’s not the profit our subscribers actually made. You see, the company was quoted in euros. When the shareholding was converted from shares into euros and then from euros back into pounds, we recorded an extra profit…
... an 83.4% profit in total.
This was one part driven by bid speculation around the French hotelier, but also by the positive move of the euro against the pound. Here’s the breakdown:
- Holding period from 27 January 2007 to 12 July 2008, during which time: The stock went up from €47 to €70
- The euro went up from 0.65 to 0.80
The window of opportunity is once again open as the pound looks set to retreat.
Three “translation plays” to watch
So, with the pound likely to flounder, what should you consider?
AES Corporation(AES:US) – AES is best known in the UK as the former owners of Drax. The infrastructure stock makes 68% of its money in emerging markets. On a forward yield of just 10 times earnings, though without any dividend, this stock still looks value for money. That must be why China Investment Corporation, the Chinese sovereign wealth fund, poured $1.58 billion into the Virginia-based power company for a 15% stake. AES says these transactions give the company the money needed to make some acquisitions.We’ve been here before.
Boeing (BA:US) – The company is capturing headlines as quickly as it’s capturing contracts. The media gaze was fixed on the maiden flight of the cutting-edge 787 Dreamliner. It’s been delayed by two years, but thankfully the group finally delivered. The pilots described the flight as “a joy”. And the display impressed a Vice President of All Nippon Airways, the jetliner’s first customer. The Dreamliner promises fuel savings that make the model the company’s most popular new plane ever, with 840 orders, worth around $140 billion.
Goldman Sachs (GS:US) – Here’s a suggestion for the more adventurous investor. According to Wall Street legend, Rochdale analyst Dick Bove, Goldman is “screaming to be bought.” “Everybody is having a fit that trading activity has weakened in the 4th quarter. But it's seasonal. Nobody puts money to work in December and the net effect is a seasonal decline in trading and people are selling (Goldman) for that reason.” In 2009, the stock market rewarded the brave. Could the same be true this year?
Just 18 months ago, the same faces were making the same bearish prophecies about the pound. What followed was a 30% fall against the dollar and near parity against the euro. Don’t let sterling’s coming correction hit your portfolio this time around.
Best wishes,
Theo Casey
For The Right Side
Editor’s note: In the forthcoming issue of The Fleet Street Letter, Theo Casey makes the biggest recommendation of his career. He’s buying the biggest success story in stock market history. At a 27% discount to its true value. To learn more about the Letter and to receive this exclusive new recommendation as soon as it is released, click here.
Past performance is not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
