Sterling and engineers: hard facts

Five decades ago, a pound bought almost three dollars and a little over 11 Deutschmarks. On Tuesday, as Theresa May, the UK prime minister, prepares to spell out details of what is increasingly expected to be a “hard Bexit” from the EU, those figures are $1.20 and the euro equivalent of 2.23 Deutschmarks. Exporters should be making out like bandits.

Engineering is one of the sectors generally considered to do well during periods of sterling weakness. According to calculations by Numis and the London Business School, four-fifths of quoted defence companies’ revenue comes from overseas sales. For industrial engineers, it is almost 90 per cent. Those proportions are not lost on investors; shares in such companies tend to do well following devaluations (defined as a 10 per cent drop in sterling within the space of a month). Following devaluations in November 1967, September 1992 and September 2008, engineers’ shares rose appreciably the following year. Earnings forecasts also tended to rise.

However, specialist groups such as Spirax-Sarco, Fenner or IMI tend not to be pure exporters. Many are large enough to do some manufacturing overseas. This, combined with complex supply chains and raw materials priced in dollars, blunts the impact of overseas revenue. A weaker pound becomes a translational rather than transactional factor, a boost to earnings that is rapidly baked into stock prices.

External economic circumstances mean not all devaluations are equal. The 1992 fall in the pound, largely a function of inappropriate UK exchange-rate policy, was very different from the 2008 variety, which was accompanied by a global slowdown in trade and investment.

Devaluations make UK assets cheaper for foreign bidders. There is little evidence that this leads to increased takeover activity. Many niche UK engineers have fallen into the hands of US buyers in particular, but inbound M&A generally tends to be correlated with economic and stock market conditions. Owning shares on the basis of what is happening to the pound remains a bad idea — in any currency.

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