Strong pound dents FTSE 100 profits

published 15 August 2014

Between April and June this year,63 quoted UK companies issued profit warnings, the highest rate in three years, says Ben Marlow in The Sunday Telegraph. One big factor has been the strength of sterling, which has hit sales and earnings at companies ranging from Burberry and British American Tobacco to BAE Systems and Rolls-Royce.

In the past year the pound has gained around 12% on the dollar and 9% against the euro. This can dent corporate results, because firms take a hit when they translate their profits made into dollars, or euros back into a strong pound, as these other currencies now buy fewer pounds.

The US and the eurozone are Britain's main trading partners, but sterling has also made big gains against the Swiss franc, Japanese yen and Australian dollar in recent years.

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Goldman Sachs notes that the trend is especially bad news for the FTSE 100 index, which makes 80% of its sales overseas. For the FTSE 250 mid-cap index, the figure is just 50%. Profit forecasts for UK stocks have been trimmed by 10% in recent months, due to sterling. This explains why the FTSE 100 has risen more slowly than its major peers this year.

But don't worry too much. As Martin Waller notes in The Times, the drag from sterling will eventually unwind. Currencies change direction frequently the pound's upswing against the dollar already seems to be weakening.

And a poor earnings result in one quarter makes it easier to post a strong improvement a year on, because the performance starts from a low base. At some stage, the currency headwind will turn into a tailwind.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.