Last week was a busy one for Brexit newsflow. The new government, led by Boris Johnson, made it clear they aren’t willing to renegotiate the withdrawal agreement without the removal of the Irish backstop.
Meanwhile, European leaders made it clear the withdrawal agreement is not open for renegotiation. Johnson and his team have responded by declaring they’re willing to take the UK out of the EU by 31 October without a deal if they have to.
This newsflow has sent both the FTSE 100 and the pound on a wild ride. The value of sterling against the dollar hit a two-year low last week, sending the FTSE 100 surging.
Rising profits The reason why the UK’s leading blue-chip index rose despite all the Brexit negativity, is because more than two-thirds of the index’s earnings come from outside the UK. As the value of sterling falls, it pushes up earnings per share, which means these companies are making more money.
British American Tobacco (LON:BATS) is a great example. At the beginning of June, the company informed investors it expects to report adjusted operating profit growth at the upper end of its long-term guidance range of 5-7% for 2019. Management also thinks earnings per share will benefit from a “currency translation tailwind” of 1% for the full year.
The sliding value of sterling is a key reason why the FTSE 100 has increased by nearly 1,000 points (around 15%) since the beginning of 2019. However, trying to tell what the future holds for the index from here is quite tricky. If the no-deal scenario plays out, the pound could fall further, which would be good news for the index.
On the other hand, a deal might actually be bad news for the FTSE 100. Sterling would almost certainly appreciate in value, pushing down earnings per share, although lifting the cloud of uncertainty that’s presided over the UK business environment since 2016 would offset some of this pressure.
Focus on the long term Here at the Motley Fool, we don’t believe in trying to time the market every week. Instead, we think investors are better off taking a long term perspective and only making investments they are willing to hold for the next five or 10 years. From this perspective, I think the FTSE 100 is going to be an excellent investment no matter what happens with Brexit over the next six months.
I think there’s a pretty high chance the global economy will be bigger in a decade than it is today. As a global index, the FTSE 100 should benefit from this growth. Even if the UK economy slumps into a recession following a no-deal Brexit, companies like British American will continue to earn healthy profits from their businesses overseas, and this should support the index.
So, if you are looking for a place to invest your money for the next decade, away from the turmoil of British politics, then I highly recommend taking a closer look at the FTSE 100. As well as its international diversification, the index also supports a dividend yield of around 4.5%.
Rupert Hargreaves owns shares in British American Tobacco. 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