Jul 7, 2016
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From currency to confidence, UK Plc battles Brexit fallout

Jul 7, 2016

Signs mounted on Thursday that Brexit-induced uncertainty and a sharp fall in sterling would hurt a wide range of companies and make it hard for them to meet their full-year profit targets.


With the country convulsed by its worst political crisis in modern times after Britons voted to leave the European Union, investors have warned the economy could tip into recession, hammering consumer confidence and threatening corporate forecasts.

Britain's biggest clothing retailer Marks & Spencer reported its worst quarterly clothes sales fall for a decade as consumers shunned spending in the run-up to the June 23 vote, but said it was too early to judge the longer-term implications.

It reiterated its full-year outlook, but analysts at Liberum cut their pretax profit forecast by 4.6 percent.

For Sports Direct the costs are likely to be high and immediate after the retailer failed to hedge against currency moves, meaning its import costs will rise. It said it could no longer predict its full-year outlook.

And Irish cider maker C&C Group, which earns almost 50 percent of its profits in sterling before converting into euros, said the currency move had the potential to wipe out any earnings gains it expected from improved trading and cost cuts.

"We're operating in uncertain times. Consumer confidence weakened in the run-up to the EU referendum and remains fragile," M&S Chief Executive Steve Rowe told reporters.

Britain's shock vote to leave the EU has stunned financial markets, with the pound bearing the brunt of the early violent reaction, tumbling to a 31-year low against the dollar.

The first economic data that will show the impact of Brexit is due later this month, when the Confederation of British Industry publishes industrial orders and retail sales for July.

Germany's DIHK Chambers of Industry and Commerce said it expected German exports to Britain to drop by 5 percent in 2017 due to the weaker pound and expected economic slowdown.


Sports Direct, which had already endured a difficult trading year due to bad publicity over the way it treats its workers, said it saw little room to pass on any cost rises to customers.

"There's not going to be much appetite for inflation from a consumer perspective, so how much of it then gets mitigated is the key," Chief Executive Dave Forsey told Reuters.

Dell, the world’s third largest PC supplier behind Lenovo and HP, said it would increase some prices on products sold to businesses in Britain.

Manoj Ladwa, head of trading at broker TJM Partners, said he expected to see further company downgrades as politicians begin the long process of renegotiating Britain's relationship with the 28-member bloc.

"Companies that suffer from a weak pound are taking an absolute pummelling," he said.

"For consumer and retailer stocks, it's not good. Margins are already being squeezed, and they'll be squeezed even further, especially if we see disposable incomes start to drop as well."

One of the first signs of strain came within the commercial property sector, where many investors tried to pull money out of funds, forcing the suspension of trading and leaving 18 billion pounds of investor cash frozen in the system.

Great Portland Estates, a central London property and investment company, said it expected the Brexit vote to hit economic growth and confidence in the British capital.

"In the near-term, we expect confidence to reduce and some business investment decisions to be deferred whilst negotiations to establish our trading arrangements with the EU are undertaken," it said.

Stocks in commercial and residential property have been hit hard by the vote to leave the EU.

While the FTSE 100 Index .FTSE has recovered from its post referendum fall, the smaller FTSE 250 Index .FTMC, which is more in line with the British economy than the multi-national heavy 100 Index, is still down 8 percent since the vote.


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