Uncertainty over the outlook for the UK economy after the Brexit vote in June has sent the pound plummeting to levels not seen since the 1980s.
After the initial falls, Theresa May’s announcement that she would trigger article 50 by March and continuing talk of a hard Brexit piled more pressure on sterling. As did an emergency cut in interest rates from the Bank of England, the effects of which were exacerbated by the Federal Reserve’s move to raise US borrowing costs.
Since the EU referendum, sterling has lost more than 17% of its value against the dollar and about 10% against the euro.
The slump has been a mixed blessing for Britain’s leading companies, with some clear winners and losers.
Businesses which make most of their money overseas are the most obvious beneficiaries of sterling’s slide, since their earnings are now worth more when translated back into pounds.
The luxury goods group Burberry, which generates about 85% of its sales abroad, has emerged as a clear winner, with overseas revenues bolstered even as its UK costs remain fixed.
The icing on the cake is the weak pound attracting a growing number of overseas tourists, from China and elsewhere, to the UK keen to snap up its trademark checked scarves and camel trenchcoats.
Burberry said this week the pound’s decline had lifted sales to tourists in its London stores by 30%. Its shares have jumped by about a third since referendum day, adding more than £1.5bn to its market capitalisation.
Associated British Foods expects to benefit from the rising value of the euro against the pound. This will lift overseas profits, which last year made up half of the total, once they are translated back into sterling, and boost margins at ABF’s sugar business, although the group’s Primark fashion chain’s UK profit margins are taking a hit from the pound’s fall because clothes are largely bought in dollars.
Mining groups listed on the London Stock Exchange but with operations everywhere from Australia to South America are also toasting the weak pound. Commodity prices are quoted in dollars, which lifts the value of the metals they mine in pound terms and boosts their profits. On top of that, precious metal miners such as Randgold Resources and Fresnillo have benefited from the recent strength of gold and silver, seen as havens in times of uncertainty.
Other global businesses such as pharmaceuticals GlaxoSmithKline and AstraZeneca benefit from the exchange of overseas earnings into pounds, and are also supported by the relatively stable outlook for their businesses (threats by the US to clamp down on supposedly excessive prices notwithstanding.)
Banks have had a more mixed time. Again overseas earners are to the fore, with HSBC, which makes around three quarters of its profits in Asia, and Barclays gaining ground. HSBC has had a hefty £37bn added to its stock market value since the referendum. Banks focused on the UK, such as Royal Bank of Scotland and Lloyds Banking Group have performed less well.
Bookmakers have benefitted too, recordingtheir biggest non-sporting event ever at the referendum, with punters placing £100m in bets. Most punters bet Britain would stay in the EU.
The companies most obviously hit by the falling pound are those most exposed to the UK economy, with the cost of imported goods rising just as demand seems set to weaken. If consumers are faced with having to pay more in the shops, they are likely to be more cautious with their spending.
Unilever raised prices on a range of products, from Marmite to Cif, by about 10% and halted deliveries to Tesco when the supermarket refused to accept the rises. This left Tesco short of several popular household brands. Although the dispute was resolved within days it is a sign of things to come in what is already a cut-throat and price-driven sector.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Looking forward into 2017, the sector faces a new challenge from the rising cost of imported food, thanks to the fall in sterling, which will probably apply pressure to margins against such a competitive backdrop.”
Staying on the high street, Sports Direct issued another profit warning in October – its third of the year – after it lost £15m in the currency markets as a result of the overnight “flash crash” in the value of sterling.
Next estimated in August that its clothing prices would rise by up to 5% next year due to the pound’s decline. Its chief executive, Lord Wolfson, said the cost of buying goods from abroad in sterling had risen by 9% for next year’s fashions, although some of thehit would be offset by weakness in other currencies and its ability to squeeze better deals from suppliers.
House prices are flat or falling as the weak pound dents consumer confidence and Brexit uncertainty pushes buyers out of deals. Housebuilders are facing weaker demand just as costs are rising. Bellway said some of its suppliers were likely to raise their prices due to the higher pound.
Suppliers of imported timber have indicated that prices could rise by 10%. About 70% of Bellways’ materials are sourced from Britain, with 20% coming from Europe. “I’m sure we’re going to have what we would call some sort of Unilever moments with some of our suppliers,” the chief executive, Ted Ayres, told Reuters.
Shares in the building sector have been under pressure since the referendum, with Britain’s biggest quoted housebuilder, Persimmon, losing 15% of its market value since the vote, equivalent to more than £1bn.
Airlines are also suffering, as the falling pound makes travellers more reluctant to venture abroad and consumers decide to conserve their cash. Ryanair recently warned that full-year profits would be lower than expected, while EasyJet suffered its first fall in annual profits for six years due to the weak pound and discounting fares. EasyJet expects another drop in the current financial year. Currency movements cost the airline £88m as the pound’s decline against the dollar increased fuel costs.
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