As a professional investor, it is crucial to be aware of the makeup of an index such as the FTSE 100. On the surface, this index contains the top 100 listed shares in the UK, but when you dig deeper, overseas exposure is much greater than you might expect. Consequently, professional investors are exposing themselves to other currencies to an extent which may surprise them.
The FTSE 100 we see today is very different to the original concept, although it does reflect the global reach of the UK's largest companies.
Understanding Currency Exposure
If a company is based in the UK, as many large multinational companies are, they are exposed to overseas markets and foreign currencies. You will find that a number of large UK companies have global exposure, with the most significant currency exposure tending to be to the dollar and the euro. On the face of it, a professional investor in years gone by would have seen FTSE 100 companies as UK companies when in fact, they are global conglomerates.
The impact of foreign currencies on revenues, profits and competitiveness is there for all to see. This is why when you see a weaker pound, the FTSE 100 will very often show a degree of strength. This reflects the fact that around 75% of FTSE 100 company revenues come from outside the UK, with some experts suggesting this figure is even higher. Therefore, as overseas earnings are converted into sterling when they announce their results, this can boost profits.
Different Sectors and Currency Exposure
To a certain degree, any company with overseas operations is exposed to currency movements. Concerning the FTSE 100, this tends to be particularly prominent when it comes to companies involved in:-
· Commodities
· Pharmaceuticals
· Consumer staples
To put this into perspective, at the start of 2023, the ten largest companies in the FTSE 100 included four based on commodities, three consumer staples and two pharmaceuticals – making up 90% of the top 10. The technology sector is also impacted to a certain extent, with the US and the Far East seen as the global hubs for technology fund raisings, although the UK is making progress in this area.
Factors Influencing Currency Exposure
A professional investor looking at the FTSE 100 will likely be aware of factors influencing currency exposure which include:-
· Economic factors – macroeconomic conditions and monetary policies
· Political factors – geopolitical events, trade policies, and regulatory changes
· Industry-specific factors – relating to those sectors identified above and others
While you must be aware of the issue, it is crucial to recognise that these factors can be positive, and it is unfair to put a constant negative spin on them. Many argue that the FTSE 100, with an estimated 75% of revenues originating from overseas, offers the perfect global diversification index.
How might this influence professional investor trading?
As a professional investor, there are many considerations when looking at your next investment, fundamentals, potential for the future and, in some cases, overseas trading and currency exposure. It is easy to focus on the UK and the trials and tribulations of the UK economy, but it is perhaps more sensible to take a broader global approach.
In some cases, where the original products or services are denominated in sterling, this can make the company more or less competitive in overseas markets. The day-to-day influence of currency movements tends to be modest, but over a full year, it can impact profits.
When looking at company report and accounts, you will often see references to foreign currencies for those with significant overseas exposure. The figures may be quoted on a constant exchange rate basis with a comment by the board of directors if they see any particular risk in the immediate future. As a professional investor, the trend is your friend, but it is also essential to do your research.
Conclusion
Many professional investors will be aware that the FTSE 100 is heavily influenced by overseas operations, with an estimated 75% of company revenues coming from outside the UK. Does this question the validity of the FTSE 100 as a "UK index" or reflect today's global markets?