The pound started to recover against the dollar on Friday after falling to its lowest point in decades. Nonetheless, I’m still focusing my attention on UK stocks for the time being.
Exchange rates
A year ago, £1 was worth $1.35. Earlier this week, that collapsed to $1.04, before recovering to $1.12.
A weaker British pound makes it more expensive for UK investors like me to buy US equities. As an example, take Tesla, whose shares trade at $268.
If the exchange rate from pounds to dollars is 1.35 – as it was a year ago – a share in Tesla will cost me £198.50. At a rate of 1.12, I’d have to pay £239.28.
That’s quite a significant difference. Buying 10 shares of Tesla now would cost me over £400 more thana year ago, even if the share price was the same.
In other words, US stocks are around 17% more expensive for me to buy than they were a year ago, other things being equal. That’s making me think twice about buying them.
Furthermore, compared to the dollar, the pound is the weakest it has been in decades. So US stocks aren’t just expensive compared to a year ago – they’re the most expensive they’ve been for some time.
That’s not to say that I’m avoiding US stocks entirely. There are some, such as Meta Platforms, that I think still offer good value despite the fall in the exchange rate.
But the weakness in the pound gives me an incentive to focus on UK stocks. With no currency exchange to worry about, the declines in the FTSE 100 and the FTSE 250 look attractive to me.
UK stocks
I think that there are good opportunities for me in UK stocks at the moment. This is true whether I take a growth, value, or income approach to my investing.
The risk with buying UK stocks is that a weaker pound means that their earnings are worth proportionately less. But I think that stocks are trading at prices that reflect this.
On the growth side, Croda International looks to me like a company with some great prospects. And the stock being down 36% since the start of the year really catches my eye.
With my value investing hat on, shares in Lloyds Banking Group look cheap to me. At a price-to-book ratio of 0.57, I think they are undervalued.
In my view, the market is underestimating the extent to which the company stands to benefit from rising interest rates.
Lastly, Legal & General shares currently have a very attractive dividend yield. From an income perspective, a yield of over 7% from a strong business looks attractive to me.
Whichever way I think about my investing, there are UK stocks that catch my eye. That’s where I’m looking in October.