Posted on 24 October 2016
Sterling plummeted to a shocking 168 year low mid-month whilst, at broadly the same time, the FTSE 100 index soared to a new intraday high which eclipsed the previous record set in April 2005.
The two events are of course connected; since FTSE companies derive 65% to 75% of their revenues from abroad, and the weakening in sterling boosted the value of foreign earnings at a stroke. This effect has probably been happening since June when sterling’s slide was initiated by the Brexit vote.
The rise in the FTSE may look good on paper, helping investors, fund managers and pension deficits - although it may not be a sustainable rise and it certainly doesn’t apply to all companies across the size and sector range. Similarly the fall in sterling could be argued to be just the thing the Doctor ordered for the UK’s long over-valued currency – that over-valuation has created an unbalanced economy and some argue that this correction could see lower house prices, higher interest rates, a surge in UK exports, more manufacturing and a little less reliance on the financial sector. In addition, as a correspondent of the FT recently pointed out, sterling’s devaluation should mean that any trade tariffs that could be levied post-Brexit will pale into insignificance; so our exports will actually be cheaper to overseas customers than they were pre-Brexit.
Surely it can’t all be good news? No, it certainly isn’t good for companies reliant on imports – sectors such as clothes and food where imported products represent 90% and 40%, respectively, of UK supplies. There’s going to be pressure for importers and we recently saw this mushroom into the spat between Unilever and Tesco; the issue may have been averted for now but that must surely spell upward prices for consumers – just in the lead up to Christmas – and so threaten their, so far, pretty robust “feel-good” factor.
As for the M&A market, these gyrations are having a similarly patchy impact, depending on the sector and which country you sit in. We’ve certainly seen the market for food manufacturing hit by inflated import prices caused by both the shift in sterling and commodity price rises; and that’s caused some domestic food manufacturing/importing deals to stutter. Conversely, we’ve also noticed a surge in interest from overseas buyers - fuelled by sterling’s fall which must make UK businesses look particularly cheap and attractive, albeit moderated by the perceived risks of Brexit, etc.
It’s a very variable M&A picture but, overall, the activity level we are experiencing remains good. Let’s hope that remains the case and that not too much of the UK is sold off abroad in this enormous “UK big-discount Sale” environment.
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