Consumers and companies most closely tied to sterling prone to the biggest hits
LONDON—Sterling’s Brexit slide is deepening a divide between winners and losers among British companies, with big multinationals and exporters largely benefiting, and importers—and many consumers—suffering from higher costs.
Over the weekend, British Prime Minister Theresa May provided some color to the timing of Britain’s planned split with the European Union, saying London would likely start the two-year negotiating process by March. Executives and investors have interpreted some of her recent comments as suggesting she was putting a clean break ahead of holding on to unfettered access to Europe’s single market, a key concern for businesses.
That has unnerved currency markets. The pound sank to a fresh three-decade low of $1.27 on Tuesday. While so many uncertainties still remain over how a split will look, British business is at the whim of sterling.
Multinationals that reap lots of revenue in dollars but report profits in sterling have been among the biggest beneficiaries, boosting shares in FTSE 100 blue-chips such as aircraft-engine maker Rolls-Royce Holdings PLC and liquor giant Diageo PLC. In late trading in London, the index was up 1.9%.
“Today is largely about currency on the stock market,” said Hargreaves Lansdown analyst Chris Saint.
Small British companies face a tougher task. Ben Brocklesby, a director at door and window manufacturer Origin, said he is locking in aluminum prices for the year to lower risk from currency valuations. He said currency movement after the Brexit vote “keeps us on our toes.”
While extensive overseas operations mainly cushion Britain’s large-capitalization pharmaceutical industry from Brexit, currency tailwinds boosted GlaxoSmithKline PLC’s core-operating-profit growth to 36% from 15% and revenue growth to 11% from 4% in the second quarter.
Anglo American PLC and Glencore PLC, whose shares have soared this year amid a broad rally in commodity prices, weren’t likely to get much benefit from the pound’s decline. But U.K.-listed miners are enjoying haven status, said Investec Securities analyst Jeremy Wrathall, as they operate exclusively outside the U.K. “That’s the major attractiveness,” he said.
Retailers such as Next PLC warn that Brexit-related costs could hurt sales next year because of price increases, but a boost in tourist spending from sterling’s decline could help it and luxury British retailers such as BurberryGroup PLC.
The currency effect isn’t all good news for big multinationals. The pound’s weakness can balloon dollar-denominated debt or have other negative accounting effects. Rolls-Royce in July swung to a £1.8 billion net loss after a revaluation of U.S. currency hedges days after the Brexit vote.
And airlines and travel groups such as easyJet PLC were among the hardest hit from Brexit amid concern U.K. travelers would stay at home rather than head abroad for vacations that were suddenly more expensive.
Uncertainty remains a bugbear for many large companies. Nissan Motor Co. owns the U.K.’s largest car factory, in Sunderland, England, but Chief Executive Carlos Ghosn last week said the Japanese company would restrict investment in the U.K. without more clarity on Britain’s future trade relations.
Sarah Malter, a New York native and director of Grand Central—a firm that advises businesses on U.K. government and EU funding programs—said the group had expected to at least double its sales next year, boosted by contracts with accounting-software firms Xero Ltd. and Sage Group PLC.
“Now, we are not so certain,” she said.
Other small and large companies are beginning to push through price increases to contend with their higher costs. The Bank of England expects annual consumer inflation to reach 2% early next year, compared with 0.6% in August.
Investors are increasingly likely to dump U.K. assets between now and the start of Brexit negotiations, said Nigel Green, chief executive of financial consulting firm deVere Group.
“Until the talks start, there will be no clear answers to the important questions about the U.K.’s future relationship with the EU or the rest of the world,” he said.
U.K. businesses might benefit from an “extended period between withdrawal and the conclusion of an agreement to regulate future trade in goods and services,” said law firm Ashursts. “The likelihood of that outcome appears to be increasing.”