The strength of sterling against the euro has lasted long enough to give quality industrials and man...
The strength of sterling against the euro has lasted long enough to give quality industrials and manufacturers the chance to adapt. The market has broadly taken account of the long-term relative weakness of the euro and so currency fluctuations have become less of a worry for most fund managers.
Since October 1996 the pound has stayed at between $1.60 and $1.70, only recently beginning to drift downwards. By contrast, the euro started the year at around 71p and has been dragged steadily down to its low point of 64p at the beginning of June, since when it has recovered just 1p.
It is only sterling strength relative to the euro that has been causing problems but as 50% of all UK exports are to Europe, this factor has contributed to the continuing pressure on the manufacturing sector.
Over the past 12 months, the FTSE All-Share Index has risen 7.8%. The FTSE All-Share Engineering and Machinery Index has moved -2.4%.
Hugh Priestley, fund manager at Laurence Keen, has been underweight engineering for at least a year and concentrating on companies with a stronger domestic market, such as financials. The engineering companies that have remained interesting are those with enough special
Steve Danby, fund manager at Henderson Investors, cites ICI as an example of a company that survived the inhospitable macroeconomic conditions that have persisted in the UK by adapting to a strong currency.
He says: "ICI started moving to more specialised areas with bigger margins where it was not competing so much on the commodity end. In late 1996, the pound started rapidly strengthening against the Deutschmark. This had a huge effect on the engineering sectors."
Danby thinks there are four reasons why the euro is and will remain weak relative to the pound. First, sterling is bouncing back from the low long-term position it has been in since it was withdrawn from the ERM. Second, interest rates in the UK are some of the highest in the western world, which supports the currency. Third, Europe is still going through a low growth period. Fourth, the euro has not had an auspicious start. The political infighting and wrangling within the ECB have kept the markets cautious.
Mike Lenhoff, analyst at Capel Cure Sharp, says: "Significantly, the comments from Romano Prodi, the president designate of the European Commission, that Italy may need to leave Emu have cast renewed doubts on the scope for recovery in the euro to materialise in the near term. Whether he was quoted out of context or not is not the issue - the statement has merely added to the uncertainty surrounding the new currency."
The recent Fed rate rises might strengthen the dollar, which will be to the advantage of the UK manufacturers who have managed to establish a strong US market. Danby thinks even this positive point is tempered by the US's low inflationary environment, which makes it difficult for exporters to show a good earnings growth, as prices tend to remain stable. However, he thinks a weakening of sterling would be a positive sign.
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