Seeking to reassure investors immediately after the Brexit vote, Neil Woodford said it was not his central view that the UK economy falls into recession.

Admitting the view may sound controversial, he added there could even be some companies that benefit.

‘Growth in consumer cash flow will be marginally lower, principally because fuel prices will be higher but of course exporters will enjoy something of a windfall,’
said the fund manager on the day of Britain’s vote to leave the EU.

While it will be some time before Woodford’s ‘no recession’ call can be proved right or wrong, his second, that exporters would benefit, proved spot on within days as Rolls-Royce (RR.) said it would generate £400 million of extra sales and £40 million more profit as a result of a weaker sterling.

Exporters and international companies are among the biggest near-term winners from Brexit because of the fall in sterling.

This group of companies may also play an important role in mitigating the negative shock on Britain’s economy from the vote.

Longer term, Woodford says the overall economic impact of Brexit will not significantly change the economic trajectory of Britain or the rest of the world.

Investors should also not expect any inflation in the UK to be enduring, Woodford’s team added, arguing deflationary trends in global markets remain a more powerful force.

Here, we look at how changes in currencies can affect investments and provide our take on some of Britain’s best export-focused and internationally-oriented companies which we believe have a bright future ahead.

Currencies and stocks

Shares in the FTSE 100 are now higher than they were prior to the Brexit vote because, excluding banks and housebuilders, blue chips in London are a very international collection of stocks.

When sterling falls the FTSE 100 should increase in value, other things being equal, because three-quarters of their earnings are generated overseas. Changes in the value of stocks based on currencies is best illustrated by Royal Dutch Shell (RDSB), which has the largest market cap in the FTSE 100 and earns most of its profit outside Britain.

Shell is listed in both London and Amsterdam, so its performance on the two exchanges shows clearly the impact of currencies on its return.

Translating Shell’s share price in London into euros shows its 24% sterling return in the month of June translates into a 15% increase when converted back into euros.

Shell, which is close to 10% of the index, almost by itself dragged the FTSE 100 higher over the month - the index gained around 4%.

Exporters and importers

Ahead of Brexit, in a presentation to a Shares Investor Evening, we outlined how different groups of companies could be affected by a Brexit vote.

Stocks can be roughly divided into four broad groups: exporters, importers, domestic and international Each of these groupings of stocks have an element of a currency trade within them.

While currency movements should rarely be the main motivation for buying a stock, investors might be able to reduce volatility in their portfolios by avoiding too much exposure to one sector or the other.

Many businesses also hedge their foreign currency exposures, sensibly to provide greater certainty, so short-term swings in currency may not translate into immediate upgrades to earnings.

Across the four groups, the most exposed to currency movements are typically importers and exporters.

Roughly speaking, investors in export stocks have a short position in the currency of the country the exporters’ operations are mainly based.

For an export business which has its operations in the UK and generates most of its sales abroad, a fall in sterling inflates sales while costs, to the extent it does not import materials, remain the same.

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Windfall profits

These changes generate the ‘windfall’ profits Woodford and Rolls-Royce referred to - they are temporary impacts which will reverse as quickly as they arrive if sterling, as it has recently, recovers its losses.

Some exporters are in sectors you might not expect.

Luxury goods provider Burberry (BRBY), for example, is one of the bigger beneficiaries of transactional foreign exchange gains, because its famous trench coats and other products are manufactured in the UK and Europe but sold in other markets.

A breakdown of the transactional impact of currencies on its profit-and-loss statement are show in the table opposite and give an idea of how the process works.

But they are only illustrative, because it is possible Burberry’s earnings in 2017 are negatively impacted if luxury spending falls elsewhere in the world.

Among smaller cap stocks, Hayward Tyler (HAYT:AIM) looks to be the best positioned of the manufacturers because most of its costs are in the UK and the majority of its sales are abroad.

Hayward hedges its foreign exchange exposure 12 to 18 months out, but it should still benefit from locking in today’s lower exchange rates in future periods.

Key risks at the business include its heavy reliance on exports of its specialist industrial pump products to coal-fired power stations, which continue to be built in many markets in south-east Asia but are increasingly under fire because of climate change concerns.

Industrial chain and transmissions supplier Renold (RNO) is another stock we previously flagged as a Brexit beneficiary.

Many of Renold’s operations are located abroad, so any foreign exchange gains on revenue might be offset by increased costs.

Overall, profit may receive a slight, short-term positive impact on foreign exchange, in our view.

Longer term, Renold offers an interesting option because of management initiatives to improve margins.

Structural growth stories

Crucially, businesses must have good underlying performance for any foreign exchange benefit to make a difference to their share price, argue analysts at investment bank Berenberg.

‘While swings in FX rates may give a temporary benefit to firms with international profits that need to be converted back into sterling, we prefer to look for good underlying structural stories,’ write analysts at Berenberg, which is house broker to some of the stocks it covers.

‘We believe stocks such as Scapa (SCPA:AIM), 4imprint (FOUR) and Tyman (TYMN) are high-quality names which could also benefit from being primarily exposed to North America, while other firms such as Keller (KLR), DS Smith (SMDS) and TT Electronics (TTG) could see high single-digit upgrades on the back of FX, all else equal.’

Berenberg also flags the stocks in its coverage universe that have high and low exposures to the outcome of the vote.

Among the least exposed are soft drinks supplier Nichols (NICL:AIM), high-end tonic water producer Fevertree (FEVR:AIM) and energy consultancy Telecom Plus (TEP), according to a screen featuring 11 factors related to Brexit.

High exposure stocks include outsourcer Interserve (IRV) and auto dealers Lookers (LOOK) and Pendragon (PDG), Berenberg’s analysts say.

‘Since [the vote], and in an effort to make sense of the exceptional volatility, we have talked to the management teams at the majority of companies in our coverage,’ the analysts add.

‘What is clear is that mentalities have changed very quickly. While some of our more defensive and more international names are not too concerned, the majority of companies in more cyclical industries are no longer talking about growth but now seem to be effectively planning for a recession with the focus being on the flexibility of cost bases, capex cuts and how resilience has improved since the last recession.

‘While it is too early to tell what the impact on the real economy will be, the key message is that there has been a dramatic elevation in the uncertainty felt by key industrial decision-makers on a range of factors, such as business investment, consumer confidence and government policy.’

AGGREKO (AGK) £12.53

Currency mix is one more reason to like temporary power provider Aggreko (AGK), a Shares pick for 2016.

Already up 36% since the start of the year, Aggreko also posted strong performance in 2008 and 2009, a resilience which can be extremely valuable to investors in tough times.

Assuming Glasgow-headquartered Aggreko’s transactional exposures remain similar today as they were back then, the business may once again be a beneficiary of currency moves.

Aggreko posted 51% growth in earnings per share during 2008 and followed that up with a 37% gain in 2009, partly because of a weaker sterling.

‘Our current judgement is that on a constant-currency basis, trading in 2009 should be at similar levels to 2008,’ said then-chief executive Rupert Soames in March 2009.

‘Given that over 70% of our earnings are in US dollars, if we achieve this trading performance, and if the sterling-US Dollar rate stays at today’s level for the rest of the year, reported results would show substantial growth over 2008.’

Share price performance year-to-date may reflect most of these gains already but our call on Aggreko is based on more than any benefit from a weak sterling.

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Chief executive Chris Weston, appointed in May 2014, is optimistic the business, the world’s leading provider of temporary power, can outgrow the industry’s forecast long-term growth rate in the low to mid single digits.

As well as its role supporting extractive industries with temporary power, its services are in increasing demand because of patchy power output from renewable sources like solar, wind and hydroelectric.

Strong cash conversion and impressive returns on capital are long-term hallmarks of this high quality operation. Investment in new gas-powered generators and loadbanks are new initiatives Weston says can drive growth in the future.

Sales and earnings per share (EPS) are expected to be roughly flat in the 2016 calendar year at £1.57 billion and 65.9p, respectively, according to Reuters data. Growth is expected to resume in 2017, with sales at £1.62 billion and EPS around 71p.

Risks include a slowdown in commodity markets, as miners and oil and gas companies are big users of temporary power solutions.

Aggreko’s strong operational performance across 2008 and 2009 may have been smoothed by the nature of its work, which is through fixed term contracts of one to two years.

The slump in commodity prices in 2008 was sharp but short, so contract renewals did not come under severe strain.

A more pronounced swoon in metals and energy prices could see Aggreko struggle to generate growth.

Avon Rubber (AVON) 845p

Three quarters of gas mask and dairy products manufacturer Avon Rubber’s (AVON) sales are dollar-denominated and just 1% of revenue is sterling-denominated, claims Panmure Gordon. The broker estimates a 4% uplift to 2016 earnings and an 8% increase in 2017 earnings if cable (the exchange rate between the pound and US dollar) stays at the $1.31 level.

This only factors in the transactional impact of sterling weakness on earnings. The company may also benefit as the slump in the pound makes its products look more attractive to overseas buyers.

Despite the positive currency implications from the UK’s vote to leave the EU, Avon Rubber is down around 3% in the wake of the result. The shares are off nearly 40% from the record high attained in November 2015 when the price topped £11.80 intra-day trading. Based on Panmure’s forecast the stock is on a reasonable looking 2016 multiple of 12.3 times.

Wiltshire headquartered Avon has been around since the 19th century with a history in tyre manufacture but now has two divisions: Protection & Defence and Dairy.

As well as a forex tailwind, the business is insulated from Brexit in other ways. Although access to the single market is relevant for a modest amount of exports of its protection products, the defence industry is already much less open than other sectors, even within Europe.

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The company has secured long-term contracts for its respiratory products and dealt with a slowdown in military spend by expanding into other markets like homeland security and emergency services.

Sales of consumable filters associated with these products also allow it to derive recurring revenue from an installed base of equipment.

The dairy business, accounting for 26% of 2015 group revenue, has been a millstone for the company of late thanks to weak milk prices which have affected demand for its liners and tubing products. However, milk prices have stabilised and profitability in the division has been protected thanks to a shift towards higher margin own brand products and services.

Despite stalling in the last 12 months, the shares are still up 850% since chief executive Peter Slabbert took over in April 2008.

Panmure analyst Sanjay Jha says: ‘We expect the stock to continue to outperform as its earnings prove resilient in a volatile environment. Long-term, the end markets for “must haves” - respiratory masks and automated milking - offer structural growth opportunities.’ (TS)

Imagination Technologies (IMG) 190.75p

It’s not an investment opportunity that necessarily leaps off the page but microchip designs company Imagination Technologies (IMG) may well turn out to be an opportunistic winner. There are few UK technology businesses on the stock market quite as leveraged to a weak pound as the Hertfordshire-based graphics specialist.

According to numbers crunched by analyst at investment banking giant UBS, for every 10% decline of sterling versus the dollar, Imagination earnings should increase by in excess of 20%, such is the company’s hefty US client exposure. Since
the EU referendum result the pound has lost roughly 10% of its value versus the dollar, from around $1.48 to about $1.33.

If that situation turn out to be prolonged, and if UBS is correct in its analysis, this implies that Imagination’s earnings per share (EPS) to 30 April 2017 could top 5p this year, versus UBS’s own bottom of the consensus range 4.27p, published on
5 April.

This feature went to press ahead of Imagination’s full year results announcement on 5 July, but presuming little change in its customer make-up from the previous year, more than 60% of its revenues stem from the US, it has further considerable US dollar denominated sales from Asia and elsewhere, while just 9% of 2015’s £177 million of revenue was earned from the UK.

It’s biggest single customer is Apple (AAPL:NDQ), which licences Imagination’s PowerVR family of graphics processing units (GPU) across its iPhone and iPad ranges.

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But there are other reasons to think Imagination’s stock may be set for a spell of strength aside from currency calculations, not least that it is increasingly being viewed as a takeover target. As we flagged on the Shares website on 9 May, a Chinese technology fund has snapped up a 3%-plus stake in the chip designer. The Chinese group, called Tsinghua Unigroup, is effectively a rough $30 billion state-owned technology fund.

But what’s really interesting about this move is ambitions to become one of the world’s biggest chips makers itself. It has been very busy hoovering up several chip tech businesses across the US and Europe, buying Spreadtrum, RDA, HP’s server business, it even tried to buy Micron, Spil and Western Digital.

After several terrible years, a new CEO, new strategy that will see its disastrous PURE digital radios business sold, and apparently clean slate, are all reasons to cheer. Analyst target price calculations sit around the 220p to 250p range, which implies anything from 16% to 32% share price upside to the current 190.75p level. It could go higher if a buyout emerges that could draw out other potentially interested parties, perhaps even Apple itself.

‘The last four intellectual property acquisitions (Tensilica, MIPS, Arc, Artisan) have been at 7.7-times enterprise value/sales on average,’ analysts at Liberum point out. Imagination trades on about 4.2-times the rough £137 million consensus suggests was reported earlier this week. (SFr)

Portmeirion (PMP:AIM) £10.28

High-quality homeware manufacturer Portmeirion (PMP:AIM) is a beneficiary of sterling weakness. The ceramic tableware specialist owns four British brands - Portmeirion, Spode, Royal Worcester and Pimpernel - that boast an illustrious history, provide a durable competitive advantage and boast strong overseas growth potential. Sterling weakness will make these exports far more competitive internationally, while most of Portmeirion’s staff costs are in the UK, the bulk of its people based at its Stoke-on-Trent factory and warehouse sites. Portmeirion does source some product from overseas, which will become more expensive but the 2015 mix between own-manufactured product from the UK and sourced product stood at 46:54, suggesting potential for a positive margin impact.

Admittedly, the UK remains the £109 million cap’s second biggest market, yet Shares expects management to push ahead with its proven diversified strategy encompassing differing geographies, products, customers and routes to market. Portmeirion’s biggest single market remains the United States at one third of revenue, though sales into the European Union (excluding the UK) speak for less than 3% of the top line, suggesting the short-term Brexit impact will be slight.

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End-market diversification is also provided by South Korea, where a recovery in sales has not yet materialised, as well as India, the finest English earthenware producer’s fourth largest market, Thailand and Taiwan. Shares believes the £17.5 million acquisition (5 May) of Lake District-based Wax Lyrical makes strategic sense. The profitable home fragrances maker primarily sells scented candles and reed diffusers and crucially, exports to more than 40 overseas markets.

Immediately earnings enhancing, the acquisition brings the Wax Lyrical and Colony brands with ‘Made in Britain’ pedigree into the fold. There are significant opportunities to grow Wax Lyrical’s sales online as well as through Portmeirion’s existing UK customers and into the US, South Korea, China and India. Though the post-Brexit world is uncertain, Portmeirion has a balance sheet like the rock of Gibraltar and is also one of the stock market’s dividend-paying stalwarts. Full-year results (9 Mar) showed pre-tax profit 13.6% higher at a record £8.6 million, Portmeirion closing the year with an increased cash balance of £11.1 million (2014: £5.9 million). 2015’s total payout rose 13.2% to 30p, a seventh successive year of dividend growth from the company, which has never cut or withheld the dividend since its 1988 stock market debut. (JC)

Shire (SHP) £45.47

Sentiment towards niche drug-maker Shire (SHP) has improved since the UK voted to leave the European Union (EU). Investors have flocked to the FTSE 100 member following 23 June’s referendum in the hope of dodging the result’s negative impact on the markets.

Large pharmaceutical stocks are typically seen as safe havens for investors. Demand for new and improved drugs never diminishes, while the global reach of the industry points to limited reliance on the UK or Europe to drive revenue growth. Shire is a perfect example of the industry’s defensive and global nature.

The majority (83%) of the £26.9 million cap’s $6.1 billion sales in 2015 came from outside of the UK and Europe. The US accounted for 73% ($4.4 billion) of all group product sales last year, up 9% on 2014’s figures. Revenues from Europe as a percentage of group sales fell by 9% to 17% ($1 billion) during the year.

These geographic biases helped propel Shire’s shares 12.3% higher in the seven days after the markets opened on 24 June. There could be more to come, especially if the pound remains weak.

The rare disease drug-maker, which is known for its Attention deficit hyperactivity disorder (ADHD), Fabry disease and Crohn’s treatments, is expected to enjoy a bumper 2016.

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According to Liberum’s forecasts set before the referendum, sales could almost double to $11.2 billion in 2016, largely thanks to the $30 billion acquisition of US outfit Baxalta (03 Jun). A $3 billion pre-tax profit is expected in 2016, up from $2.7 billion in 2015.

The acquisition of Baxalta provides a boost by adding revenues from the haemophilia, immunology and oncology markets to
the business.

Additional growth will come from Dublin-based Shire’s pipeline of treatments, which Liberum estimates will add $1 billion to sales by 2020. This will help free cash flow rise each year until 2021 when it reaches $5.7 billion, according to forecasts.

Acquisitions will also play a continuing role in the group’s growth. Shire has bought more than 20 companies in its 30-year history and the expected prolonged low interest rate environment should allow the group to fund deals
more cheaply.

The company trades at a significant discount to the pharmaceutical sector. Trading on 11.7 times earnings for 2017 puts the stock on a 19% discount to its peers, according to Liberum. (MD)