While many commentators have discussed the potential problems that could be caused by Brexit, little focus has been awarded to the benefits the UK’s decision to leave the UK brings. After all, there are winners and losers in every political and economic development, with those companies that report in sterling but derive much of their trade from outside the UK being potentially major winners.
Since 23 June, the value of sterling has fallen from around £1/$1.48 to £1/$1.33. That’s a huge fall for any currency and has occurred because of the uncertainty Brexit brings. Furthermore, the Bank of England now looks set to reduce interest rates over the summer, which is likely to have a further negative impact on the value of sterling.
This is great news for UK exporters, since it means their prices are much more competitive abroad. It also means their earnings are very likely to gain a boost in the short run and continue to feel the benefit over the longer term.
Constant demand
One company that falls into this category is beverages business Diageo (LSE: DGE). It’s a truly global business that reports in sterling. Therefore, it would be unsurprising for its top and bottom lines to grow at a faster rate than if the UK had decided to remain in the EU, in which case sterling may not have weakened to the extent that it has.
Beyond benefitting from weaker sterling, Diageo continues to offer a relatively stable financial outlook. It operates in a wide range of geographies and has a well-diversified product stable, which means its profitability is robust.
Furthermore, the alcoholic drinks business tends to perform well in economic rain or shine, with demand for beers and spirits being constant and akin to consumer staples rather than discretionary items. This stable outlook could be a worthwhile ally for nervous investors over the medium-to-long term.
Future takeover target?
Also reporting in sterling and operating across the globe is BAE (LSE: BA). Like Diageo, it should gain a boost from weaker sterling and there’s a reasonable chance that BAE could become a takeover target. That’s because its shares are cheap. They trade on a price-to-earnings (P/E) ratio of just 13.8 and when the financial strength and long-term growth outlook of BAE are factored-in, this seems to be an attractive price to pay.
BAE should benefit from an improving US economy as that country remains the biggest military spender in the world. And since interest rate falls are on the horizon, BAE’s yield of 4.1% may hold vast appeal to income-hungry investors.
Exceptional price rise
Meanwhile, Rolls-Royce (LSE: RR) should also benefit from a weaker sterling and like BAE, could become a takeover target. Rolls-Royce is also set to benefit from the implementation of a new strategy that will likely see it become leaner, more efficient and more profitable over the medium-to-long term. And due to an improving US economy, demand for its products could also rise as defence spending cuts are moderated.
Rolls-Royce’s share price performance year-to-date has been exceptional. It has soared by 23% and this trend could continue since the company has a price-to-earnings growth (PEG) ratio of only 0.6. This indicates that it offers growth at a reasonable price within an industrials sector that has historically been relatively expensive.