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Has the Brexit bubble burst?

More than a year after the UK voted for Brexit, the cloud of uncertainty hanging over Britain’s future has failed to clear. As the economy feel the strain, Brexit negotiators must be feeling the heat – after all, they’ve had to work through their summer holidays.

They aren’t the only ones craving a bit of peace over the summer break. Pouring over the official economic numbers when you’re working from home is a lot tougher when my children are pretending to be animals in my ‘office’.

Waking up to Brexit uncertainty

In a sign that analysts have shifted their gaze to the uncertainty ahead, forecasts for profit growth in 2018 have halved, new research from UBS and the FT suggests. The number-crunchers had initially pencilled in earnings growth of 13.7% before Brexit, which has now wound back to just 7.2%.

This marks a shift from the bumper earnings season in the first half of this year. Of the UK’s 100 largest companies, around 40 smashed their revenue and profit expectations, whilst just ten underperformed¹.

It’s a relief for investors; equities have looked highly rated for some time now, and there is fear that a poor earnings season could trigger a sell-off as investors rush to protect their money.   

The weak pound

The weak pound’s helped businesses listed on the FTSE 100, as the majority of the earnings of the blue-chip index are generated in dollars. When they’re translated back into sterling, bosses get more pound for their buck.

When it comes to sterling’s devaluation, however, it’s a case of ‘with one hand he giveth, with the other he taketh away’.

The cheap pound has increased the cost of imports, which has accelerated inflation above the Bank of England’s 2% target. With wage growth failing to keep up with the momentum in price growth, consumers are feeling the squeeze.

As household income fails to stretch as far as it did this time last year, Brits aren’t spending as much. Whilst second quarter GDP was confirmed at 0.3% in the second quarter, consumer spending slumped to a two-and-a-half year low².

The late Easter and second warmest June on record should have been a perfect concoction for struggling retailers in need of shade from the glare of the income squeeze, but, alas, it turns out Brits just aren’t spending.

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Is it because Brits have no money, or because they’re saving it? My husband and I will probably cover this off on our date night tonight – i.e. £10 summer meal deal when the kids are off at their grandparents.

Why are business profits important to the economy?

Whilst the past earnings season has been a useful injection of confidence for investors, signs that the outlook could deteriorate will be a worry.

Not only are company profits an indication of consumer spending in some sectors, but they also play an important role in economic growth. Business investment is a component of gross domestic product, which measures the economic health of a region, and relies on the profit generated from business activities.

Investment is already showing strain as bosses judge the risk of pumping money into UK business. Around £43.8 billion was spent in the second quarter, which is flat on the three months before last year’s referendum, adjusted for inflation.

The auto industry looks hard hit; investment fell 75% in the first half compared to 2015, numbers from the Society of Motor Manufacturers and Trades shows. Big US and European banks could also move over 11,000 jobs from the UK to maintain business with the EU after Brexit.

Whilst the UK struggles, a robust economic backdrop in Europe has driven the euro to an eight-year high against the pound. There’s clearly two sides to the foreign currency coin; which highlights the benefits of a diversified portfolio.

Yes, the diversification that would have helped Europeans in 2015 is now probably hurting their portfolios, whilst UK investors with the same strategy are probably thanking their lucky stars – 12 gold ones to be precise.  

1)Analysts halve UK profit growth forecasts for 2018, Financial Times, August 2017

2) ‘Largely disappointing’ or just a temporary dip? Economists respond to UK GDP data, Financial Times, August 2017

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