UK corporate profits forecast to halve in 2018

UK corporate profit growth could halve in 2018 as the benefits of currency weakness fade, according to the data released this morning (24 August).

The analysis, conducted by FTAdviser’s sister paper the Financial Times, indicated profit growth in 2018 could halve to 7.8 per cent, following a bumper year in 2017, where profits were boosted by the weakness of sterling.

There are two ways in which company profits benefit from weak currency, “transactionally” or through the “translation effect”.

If a weaker currency means a company’s products are more competitively priced on international markets, then profits are boosted by increased sales.

If sales remain largely flat, but the earnings are achieved in a currency that is stronger than sterling, they are worth more.

The FT analysis indicated the bumper profits this year have been more the consequence of translational effects, an effect that drops out of the data in subsequent years. 

“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.”

The analysis found that while many companies have committed to investing more in the UK, many businesses have delayed, or cancelled.  previously planned investments.

The data, compiled by FT in conjunction with UBS, showed companies expect profit growth of 7.8 per cent next year, compared with 19 per cent profit growth this year. The 7.8 per cent number is about half the rate predicted last June.

Mr Nelson said that while the weaker pound gave an immediate boost to corporate earnings, it was also a slower-acting brake on consumer demand.

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

Most companies have been circumspect about how Brexit is affecting their plans, but there is evidence that some plans are being deferred.

Investment in the automotive industry has fallen 75 per cent in the first half of this year compared with 2015 levels, according to the Society of Motor Manufacturers and Traders.

Meanwhile, Britain seems to have lost some of its appeal as a venue for merged companies.

Chemicals groups Linde and Praxair, which agreed a merger in June, considered basing themselves in the UK before opting for elsewhere in the EU. Austria’s RHI had originally planned to incorporate in the UK after merging with a Brazilian rival.

But the maker of heat-resistant materials decided against the move, citing possible conflict between UK and EU law after Brexit.

Kathleen Books, head of research at City Index, noted that the most recent GDP number in the UK showed that capital investment, that is, investment in plant and other one-off items, by UK companies was better than expected in the second quarter of this year.

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