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23 August 2017

Financial Times: Analysts halve UK profit growth forecasts for 2018

Profit growth at the UK’s largest companies is expected to fall by more than half in 2018, a review of analyst forecasts has found, as a year of post-Brexit currency gains gives way to longer-term concerns about the economic consequences of Britain’s break with Europe.

The deteriorating forecasts, revealed in data compiled by UBS for the Financial Times, follow a year in which bumper profits helped buttress investor confidence in London-listed companies.

They reflect how financial markets are shifting their gaze towards the permanent and still highly uncertain economic changes that will follow Britain’s departure from the EU.

Many companies say it is too early to predict the effect of a Brexit settlement whose outlines are not yet known. Several big industrial groups have confirmed investments that will strengthen their ties to the UK.

But others have paused their plans citing uncertainty over the terms of trade, or are looking at moving elsewhere in the EU.

“The currency is a knee-jerk reaction that mathematically comes through,” said Nick Nelson, head of European equity strategy at UBS. “Years two, three and beyond there’s more uncertainty.”

FT reporters have reviewed the past year of corporate activity for signs of how British business is adapting to the prospect of life outside the 500m-strong bloc.  

Corporate profits have surged, but analysts predict a slowdown in 2018

FTSE 100 companies have consistently beaten the profit forecasts analysts made before the referendum last year. Thanks, in part, to revenue earned overseas — about three-quarters of total FTSE 100 revenue — that was worth more as a result of falls in the value of the pound, profit growth reached 20 per cent in the three months to June 30, 2017.

But analysts are less optimistic about the coming year: according to data compiled by UBS, they expect profit growth to fall to 7.2 per cent in 2018. That compares with expected growth of 19 per cent this year and is about half the rate they predicted last June. Mr Nelson said that while the weaker pound had given an immediate boost to corporate earnings, it was also a slower-acting brake on consumer demand. 

“It’s made imports more expensive, and that’s been a headwind for consumers’ purchasing power,” he said. “There is a slowing in the economy that’s weighing on the part of the market that’s domestically exposed.” [...]

There are few signs of a jobs exodus, outside London’s international banks

US and European banks have said they could move more than 11,000 jobs outside London so that they can continue to trade in the EU after Brexit. But UK banks have barely changed their plans.

Some, like Lloyds, do little business outside the UK. Others, like Standard Chartered and HSBC, are mostly active outside the EU. Barclays is moving just 150 workers to Dublin, and RBS will add the same number in Amsterdam. HSBC, which is leaning towards Paris, has spoken of 1,000 jobs moving.

Outside the financial sector, high street chain Wilko is one of the few companies to blame Brexit for job cuts although it also faces rising pay costs because the minimum wage is going up. The company is considering axing about 4,000 jobs, saying “the outlook for 2017 and beyond has been reduced from pre-Brexit levels”. [...]

Full article on Financial Times (subscription required)

© Financial Times

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