By Simon Falush
LONDON, Oct 30 (Reuters) - The international flavour of the UK's FTSE 100 means that it stands to gain more than its European peers from the dollar's strength, helping it to weather the worst ravages of the looming recession.
Sterling has fallen over 17 percent against the dollar since the start of the year, as the focus has shifted away from the bleak outlook for the U.S. economy to the difficulties facing European and Asian markets.
However, the pound's fall from grace has been even more dramatic than this suggests. It fell from a peak of over $2.11 in November last year to below $1.53 this month making UK exports far more competitive and dramatically increasing revenues for companies with global exposure.
"The recent slide in sterling has been dramatic, turning a foul wind fair for UK-based companies selling on a global basis," said UK broker Teathers in a note to clients. It also noted that the cheap pound would make UK companies a more attractive acquisition target for non-UK domiciled companies.
The pound is also down 7.6 percent against the euro but the UK's blue chip companies are much more heavily exposed to the U.S. and dollar-linked economies than to those of its continental neighbours.
Broker Williams de Broe estimates 58 percent of earnings from FTSE 100 companies is in dollar or dollar-pegged currencies, while Romain Boscher, fund manager at Groupama AM in Paris, said well below half of euro zone trade is from overseas.
Morgan Stanley research based on data from 2007 shows 20 of the 30 European companies with the largest proportion of exposure to the U.S. are listed in the UK.
All but two of these companies were at least 50 percent exposed to the U.S.
Williams de Broe estimated that a 20 percent increase in the value of the dollar against the pound will lead to a 16 percent rise in earnings for UK companies.
Some 30 percent of companies in terms of value in the UK's blue-chip index report in U.S. dollars compared to just 12 percent of continental European companies, according to data from MF Global.
"With the dollar rising, you've immediately had a gain in terms of sterling earnings, because if you've got 50 cents of earnings per share, you've got to convert that into pence," said Stewart Breed, quantitative equity strategist at MF Global.
With many analysts predicting the worst recession since 1930s, any such advantage will be jumped on by investors seeking to preserve the value of their portfolios.
"We see talk of the toughest recession in post-war times coming up, so clearly one of the things people will be looking for is any marginal advantage that can be gained from international trade," said Simon Derrick, senior currency analyst at Bank of New York Mellon.
TECHNOLOGY TO GAIN
UK technology and engineering companies are set to be significant beneficiaries, said Julian Fosh, fund manager at Liontrust.
Renishaw posted a 75 percent increase in first-quarter profits earlier this month and said it was encouraged by the strength of its order book.
"Part of Renishaw's strong forecast numbers is down to currency," Fosh said. "Certainly with the pound back where it is now, there will be a big benefit for these engineering firms yet to come in terms of currency translation."
Similarly Wolfson Microelectronics stands to gain from the greenback's strength.
"Note that the lower GBP/USD provides significant support to margins as opex falls from US$82m this year to $68 milloin next year, assuming an average rate of $1.60 for next year," Royal Bank of Scotland said in a note to clients.
However the effect of the falling pound will not be a universal boon for investors in UK equities.
Miners and energy firms, companies which often report results in dollars anyway, will not see the same benefit of the effect that companies reporting in sterling will.
And for international investors buying into UK equities, further sterling weakness will lead to falls in the value of their holdings that would outweigh benefits from increased earnings. (Reporting by Simon Falush; Editing by Chris Wickham)