The relentless strength of sterling is biting into some U.K.
stocks.
A rebounding U.K. economy this year has heightened expectations
that the Bank of England will be the first major central bank to
raise interest rates, boosting the pound relative to other
currencies.
That is good news for Britain's summertime holidaymakers. But
companies including luxury retailer Burberry Group PLC, advertising
heavy-hitter WPP PLC and Associated British Foods PLC have all said
in their recent earnings releases that sterling's upward march is
increasing the cost of their products and services abroad, leaving
a sizable dent in their revenues. Analysts and investors say the
perky pound is becoming a drag for many of the country's
stocks.
"Relative to euro-zone companies, U.K. exporters could clearly
be hit by the currency, and that is something that makes us quite
cautious on the U.K. market as a whole," said Emmanuel Cau, an
equity strategist at J.P. Morgan Chase & Co. in London.
According to strategists at Goldman Sachs, about 80% of FTSE
100-company sales are generated outside of the U.K., making them
particularly vulnerable to exchange-rate movements. That dependence
on overseas income has contributed to the FTSE 100 index lagging
other markets in Europe. Since the start of the year, the FTSE has
lost 0.22%, while Europe's Stoxx 600 index, for example, has gained
3.25%.
Sterling has defied many expectations for a drop and climbed by
4% against the dollar so far this year. It now stands at more than
$1.71, its highest point in nearly six years. It has also cranked
higher against the euro, hitting two-year highs.
Burberry's Chief Financial Officer Carol Fairweather last week
warned that if exchange rates remain where they are, full-year
retail profit would be reduced by GBP55 million ($94 million), a
hit that is GBP15 million more than a previous estimate in May.
Associated British Foods PLC also last week said the strength of
sterling had a negative impact on sales, particularly in its
overseas grocery and ingredients businesses. Total group sales fell
3% in the 16 weeks to June 21. If currency fluctuations were
stripped out, sales would have climbed 3% over the same period, the
company said.
And at the end of June, WPP Chief Executive Officer Martin
Sorrell said that reported revenue for the first five months of the
year was up by just 1.2% at GBP4.43 billion, held back by the
strength of the pound.
J.P. Morgan's Mr. Cau reckons the number of U.K. firms reporting
weaker sales on the back of a stronger pound will likely increase
over the next few weeks as more companies file their quarterly
earnings reports.
Unfortunately for them, the pound shows no sign of turning.
"Right now the market is pricing in the first interest rate rise
probably about November or December time; if we suddenly see some
very strong data coming through in the U.K., we could see those
expectations brought forward and that could lift sterling even
further," said Azad Zangana, European economist at Schroders in
London, an asset manager.
Mr. Zangana said his firm has cut its exposure to FTSE 100
companies to underweight in the past month or so because of the
stronger pound.
Other investors say that while they don't avoid export-focused
companies, they look for U.K. firms that are able to prosper even
in a strong pound environment because they both produce and sell
their goods overseas.
"These tend to be the more global companies, which are listed in
the U.K.," said Simon Brazier, head of U.K. equities at
Threadneedle Investments, citing Unilever PLC as an example.
Write to Ben Edwards at ben.edwards@wsj.com
