Sterling slump has mixed impact on businesses

Pound Coin

While people jetting off for their summer holidays are worrying about a reduction in their spending power as a result of the weaker pound in the wake of the Brexit vote, the plunge in sterling is also posing questions for business executives.

Company results published last week illustrate the diverse impact that the fall in the pound to a 31-year low is having. Shares in the pest controller Rentokil rocketed to a 12-year high after the company, which generates 90% of its revenue overseas, said the slide in sterling would boost its profits. But retailers such as Sports Direct and Marks & Spencer said they faced challenges because they needed to buy dollars, which now cost more, to purchase clothing abroad.

Pound v dollar
Pound v dollar

Sterling’s value has become the key barometer for the economic impact of the result of the 23 June referendum: it raced to $1.50 when the polls closed amid expectations of a vote for remain, and quickly sank to about $1.30 when those expectations were not met. The pound could come under more pressure this week when the Bank of England has the first opportunity since the referendum to cut interest rates.

The movement has influenced the way shares have traded in the past two weeks. The FTSE 100 index is trading higher than it was before the referendum; the FTSE 250 index, made up of the next tier of companies, has been as much as 10% lower.

Eoin Murray, head of investments at the fund managers Hermes, said: “In the FTSE 100, 60 or 70% of the revenues of the companies come from outside the UK. The FTSE 250 has been tracking the fall in sterling – that is a much better gauge [of the UK economy] to my mind.”

Associated British Food (ABF), which owns Primark and has a sugar trading arm, said in its results last week that overseas profits in the final quarter would be better than expected once translated into sterling, because of the impact of sterling’s fall against the euro. Its UK profit margins would suffer as a result of the falling value of the pound against the dollar and the euro, but this would be offset by a favourable boost to margins at its sugar business.

ABF’s finance director, John Bason, was not alone in saying clothing retailers, which often source their products overseas, would face cost pressures. Marks & Spencer, which reported its biggest quarterly fall in clothing sales in 10 years, imports between $1bn to $1.5bn (£770m – £1.16bn) worth of goods each year.

Sports Direct said it too would take a knock from the fall in sterling as it had not taken any steps to protect itself from volatility in the currency – known as hedging – for the 2017 financial year.

The currency effect is one of the reasons HSBC has defied the drastic drop in share prices that have been inflicted on other banks since the Brexit vote. Its shares are higher since the referendum not only because it is not entirely focused on the UK but also because it reports results in dollars.

The pound’s slide may have provided a small piece of good news for Royal Bank of Scotland at a time when the bailed-out bank’s share price is trading at levels last witnessed in the 2009 crisis. Its chairman, Sir Howard Davies, revealed that it had taken steps to prepare for a multibillion-dollar fine from US authorities over the

way it sold mortgage bonds during the credit crunch.. By some estimates the penalty could amount to $13bn, a princely sum even before the pound’s slide.

The long-term impact of the pound’s slide will depend on whether exporters can capitalise enough upon sterling’s fall to boost their overseas sales substantially, and whether those companies that are paying more to import goods will pass on the increase to consumers.

Analysts at Capital Economist are optimistic: “We think the pound’s fall could even be described as a Goldilocks depreciation – big enough to have at least some beneficial effect on exports but not so big as to push inflation up too sharply.”

Powered by Guardian.co.ukThis article was written by Jill Treanor, for theguardian.com on Sunday 10th July 2016 14.18 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

JefferiesAnd the Best Place to Work in the global financial markets 2016 is...

Register for Financial Markets News Alerts