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Why I believe these FTSE 100 stocks will continue to outperform

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It’s easy for me to feel somewhat despondent over the state of the economy and the performance of my portfolio at present. Yet there is one driving macro-economic factor that suggests to me that some stocks listed on the FTSE 100 could benefit.

It all comes down to exchange rates

The British pound has struggled and is presently at lows not seen since 1985. The real story here, however, is the increasing strength of the US dollar. This reflects the US Federal Reserve leading the way in raising interest rates, causing capital to flow to the dollar. A strong dollar is detrimental to companies that must pay for their raw materials in dollars, and therefore increases their costs that must then be passed onto the customer.

However, the FTSE 100 is full of companies that export products and services overseas, and the weak pound makes their goods more attractive. One such company would be BAE Systems. Not only does it benefit from a weaker pound but also operates in an environment where defence spending is expected to remain robust given current geopolitics.

Energy and commodities are likely to benefit the most

Another consideration is those companies that earn a significant proportion of their revenues overseas, and those profits are then repatriated back to the UK and converted to pounds. Oil and gas companies are obvious examples of this, as are mining and natural resource stocks. The benefits of favourable currency exchange can be significant.

Consider the performance of Shell and BP. Both have seen their share price hold up well against the broader indices. At first glance, this may appear odd when compared to the sustained dip in the oil price we have seen since June. But oil is priced in US dollars. Convert it to pounds and that share price appears justified.

The same case can be for the large mining stocks, several of which feature in the FTSE 100. Glencore has recently announced record profits plus a special dividend for investors on the back of strategic commodity investments. Continued elevated energy prices should continue to contribute to its already strong cash position.

Similar observations can be made in the precious metals sector.  The prices of silver and gold have had a torrid time recently. The share price of precious metal miner Fresnillo, on the other hand, has failed to participate in the downturn.

One note of caution

The energy sector has had a lot of media attention recently, and there is persistent talk of windfall taxes on the most profitable companies. While the present political climate suggests further tax rises on such companies are unlikely, it is something I must keep an eye on.

Investing is seldom two dimensional

What I have had to learn as an investor is that it is all too easy to get caught up in the bad news when, in fact, negative headlines can — in some cases — mask an investment opportunity.

The post Why I believe these FTSE 100 stocks will continue to outperform appeared first on The Motley Fool UK.

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Michael Hawkins has a position in BP. The Motley Fool UK has recommended Fresnillo. 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.