28 days later…

We’re taking stock four weeks on from the result of the EU Referendum. A great deal of water has passed under some political bridges; but in terms of BREXIT practicalities we’re not much the wiser and won’t be for some time. The eye of the storm is focused on those most exposed to the greatest uncertainties and sterling transactions. As you move out to the edges, it’s looking more like “business as usual”, with the falling pound even creating sunnier skies for exporters.  But are the latest surveys signalling more trouble to come?

Too soon to say?

The UK is still part of the EU, so the only reaction we can see now is the impact of uncertainty – not any changes in labour, trade, regulation etc.  For those at the eye of the storm, it’s not business as usual. This is largely companies exposed to the c.15% drop in the value of sterling in the last year and those most exposed to the more immediate uncertainties around business and consumer confidence.  Airlines obviously sit in the middle of that Venn diagram, although – and it’s worth stressing again and again – that BREXIT isn’t the only pressure on businesses. Airlines would be under pressure from slow growth and geopolitical issues, BREXIT or not. Retailers have been in margin vice for some time, with significant sector disruption.  Even traditional sectors like automotive are being disrupted. BREXIT’s just another complication in a complex world – albeit a pretty big one for some.

 As you move away from the storm’s eye, there is arguably a slower burn – companies who could be hit by problems at other companies and secondary economic effects. But that impact isn’t immediate and there are still so many more questions than answers on what BREXIT will mean that they can’t comment on that either. One of the most common phrases in trading statements in the last 28 days has been “it’s too early to say” because for many, it’s too early to say.

 The survey says…

So what do the surveys suggest might be happening in the broader economy? How is the uncertainty and weak sterling affecting activity? How might this translate?

The recently reported Bank of England report from regional agents was taken a week after the vote. Given that most companies were “shocked” by the referendum result, few had contingency plans and the lack of information left most in “business as usual” mode it’s hardly surprising that agents found conditions normal a week on from the result. What’s more important is what companies expected to happen, which was delays in decision-taking – including on capital & hiring –  and delayed or cancelled M&A in the coming twelve months. Companies were also worried about the supply of labour.

The snap Markit Survey for July ties in with these expected changes in behaviour. PMI for the services sector – which accounts for nearly 80% of the economy – has dropped to 47.4 from 52.3 in June. The manufacturing PMI has also dropped to 49.1 from 52.1. The composite PMI fell to 47.7 from 52.4 against a forecast of 49. A reading below 50 indicates contraction and Chris Williamson, chief economist at Markit, commented:

 July saw a dramatic deterioration in the economy, with business activity slumping at the fastest rate since the height of the global financial crisis in early-2009.

 This survey doesn’t cover construction, which has been another sector at the epicentre of BREXIT uncertainty and so is unlikely to look any rosier.

Elsewhere, we’ve also had mixed data relating to the all-important consumer. On the positive side of the ledger are record employment figures, indicating a robust market – even post-National Living Wage.  The MPC will likely treat the signalled jump in inflation as a short term effect and UK monetary policy should  still ease this summer. But this won’t be enough to prevent a hit to disposable income from rising prices. Confidence is falling and retail sales yo-yo-ed pre-BREXIT up 0.9% in May, down 0.9% in June.

 Brighter in places

This is a tougher economic climate – as we reflected in our recent ITEM forecasts – and it seems inevitable that this will provide a broader impact on companies, pulling more companies into the path of the storm.  But it’s still very difficult at this point to judge the size and longevity of this storm given the uncertainties around any deal and any measures put in place by government and central bank to shelter companies and consumers.  

 Also, the differential impact discussed earlier still holds – even if the economy slips.  In more defensive areas of the economy –and in exports – there is brightness. The sterling–export equation is never simple. There can be a loose tie between price and demand in high value goods and services. Global demand matters. Here the picture isn’t rosy, but it’s not awful. The IMF’s latest growth report reads a bit like the end of a game show, where they show you the GDP you could have won. But the fact that they were ready to upgrade pre-BREXIT, suggests some underlying momentum that might survive, depending on the outcome. A quick and satisfactory outcome might perk up all the numbers.

Plus companies who have prepared – by being more adaptive, agile and operationally fit – will be better placed. There are always winners in even the most distressed sectors.

 In the meantime…keep your eye on yields and deals

The UK sold £1.5bn dose of debt at an average yield of 1.64% down almost half a percentage point in less than two months. There has been such a prolific post- referendum bond rally – aided by ECB buying – that there is talk of Japan issuing a  perpetual 0% bond.  Bad for banks and UK pension schemes struggling with record deficits. Italian bank stress tests are due at the end of the month, which – as Moody’s says – may prove to be the moment where the authorities will have to step in.

Meanwhile….Dealogic data shows that 81.3% of UK M&A deals have involved a foreign company buying a UK group in 2016.  Meanwhile, domestic UK M&A fell by more than 47%.With debt markets virtually giving money away and sterling assets 15% cheaper than this time last year, it’s not surprising that UK assets are looking more attractive – especially those with significant intellectual property and overseas markets. Global technology deals are up almost 18% year-on-year – bucking the overall trend. As we’ve said before, in fast moving sectors, companies cannot afford to stand still – even in periods of uncertainty..