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The pound’s Brexit recovery could hammer the FTSE 100, Terry Smith and this top investment trust

Harvey Jones
One pound coin

All hail the mighty pound. After years in the doldrums in the wake of the EU referendum result, it is now resurgent.

Sterling resurgent

Sterling is up 7% against both the US dollar and the euro since mid-August, according to a note from brokers Stifel, and if Boris Johnson’s deal passes Parliament on Saturday, it should climb higher still.

That’s an incredible turnaround, as expectations of a no-deal departure at the end of this month all but collapse (regardless of what happens tomorrow).

However, this is bad news for FTSE 100 blue-chips with hefty overseas earnings, the UK’s favourite fund manager Terry Smith, and the highly successful Scottish Mortgage Investment Trust.

Foreign earnings take a hit

The FTSE 100 was the shock beneficiary of Brexit. After the briefest of wobbles, it surged in the wake of the June 2016 referendum result, as investors woke up to the fact that companies on the index generated 77% of their earnings overseas, and the crashing pound meant these were worth much more when converted back into sterling.

The pattern has been repeated ever since. Positive news on Brexit lifts the pound, and sinks the FTSE 100, which is down almost 3.5% over the past week.

That may change if we do get Brexit clarity at some point. It would be hard to see the FTSE 100 continuing to struggle if the wall of money that is rumoured to be waiting on a resolution sweeps into the UK, driving up asset prices.

These top funds could suffer

However, many well-known investment funds could take a knock, notably the UK’s most popular, Fundsmith Equity that is run by star fund manager Terry Smith, up 161% over the last five years. As I have mentioned before, his all-conquering fund has enjoyed a massive lift from its exposure to the US, whose markets have outperformed in recent years. An incredible two-thirds of the fund is invested in the States, and they are worth 7% less in sterling terms since mid-August.

That is hardly the end of the world, but it’s worth knowing. It is a similar story for Scottish Mortgage, up 131% over the last five years. It gives you a global diversified spread of stocks, but is currently 51.6% invested in US equities, and therefore vulnerable to recent dollar slippage.

The rest of the fund goes into markets such as China, Europe and India, where returns will also shrink in sterling terms. Just 2.6% of the trust is invested in the UK. Fundsmith Equity is more balanced in this respect, as it invests 17.5% in UK equities.

Take a shopping trip

Stifel said high exposure to non-sterling assets is having a material negative impact on the net asset value (NAV) of trusts like this one. “Scottish Mortgage, which has almost all of its assets in non-sterling currency, will have seen a currency headwind of around 7% on its NAV since mid-August.”

Of course, Boris could lose on Saturday and the pound could be falling on Monday. Even so, now that no deal looks no-go, the pound should hold up reasonably well, whether we leave or remain, and whether there is a second referendum or not. Check your portfolios for exposure.

Alternatively, this could be a good opportunity to go shopping for overseas shares, given that your pounds now travel up to 7% further.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019