Calm before the storm? UK companies' profits climb to three-year high

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Companies in the UK reported a record-breaking performance in the final quarter of last year, in spite of political and economic turbulence, according to the latest report from The Share Centre.

Revenues climbed by 5.5 per cent (£5.8 billion) on like-for-like basis to £116 billion. Growth in revenues was reported across large and mid-sized companies alike, with many benefiting from sterling's weakness.

Compass, Imperial Brands, and Bellway collectively accounted for three quarters of the overall rise. Property-related companies such as Zoopla, Bellway, Paragon and Grainger Trust were also boosted by the relatively strong performance of the housing market.

Meanwhile, businesses related to travel saw revenues come under pressure. TUI and Thomas Cook both saw sales fall, with the latter pointing to the negative impact of the terrorist attacks in Turkey.

WEAK POUND SUPPORTS FTSE 100 FIRMS

Easyjet too saw a sharp decline, ending six consecutive years of growth, as the airline was unable to reduce costs in the face of lower revenues.

Overall, companies in the top 100 saw sales rise by 5.6 per cent, slightly faster than mid caps (5.2 per cent). Large caps were buoyed by their greater exposure to overseas markets and favourable exchange-rate factors. However, mid caps outperformed their large-cap peers at the bottom line.

Helal Miah, investment research analyst at The Share Centre, says: 'A weaker pound is supporting internationally exposed large caps, and those with overseas or dollar-based earnings will see dramatic rises in sales and profits in the year ahead.

'We believe the dominant sectors in the top 100 should continue to do well in 2017 supported by steadily rising oil and commodity prices while the giant pharmaceuticals see more rewards from R&D investments.'

Amongst the financials, the banks' UK operations look steadier, Miah points out, but past misdeeds continue to haunt them. For many financials, the issue of passporting rights in the upcoming Brexit negotiations will be crucial.

The UK-focused sectors, such as the retailers, could face difficult times too. While the food retailers have reported better-than-expected figures and have largely figured out ways to hold onto market share in the face of rising competition from the discounters, the picture from the non-food retailers has been gloomy.

RISING INFLATION AFFECT

Rising competition from the internet combined with changing consumer patterns away from goods to experiences will bring up obstacles. As will whether they can pass on rising import costs.

The UK economy itself is still unaffected by the coming divorce from the EU, and continues to enjoy policy support from the Bank of England.

But costs in the UK are rising fast, reflected by rising levels of inflation. This could impact the margins of domestically oriented companies.

Can these stocks handle rising inflation?

Uncertainty over the UK's future trading relationship with the EU could depress corporate investment too, acting as a longer-term drag on growth.

But so far at least it is business as usual, with Brexit having minimal impact.

According to James Baker, fund manager of the Chelverton UK Equity Growth fund, some retailers that sell large ticket items have suffered since last June's vote, but on the whole the 'wind has been blowing in the right direction' for most businesses.

'Article 50 hasn't been triggered yet, so most businesses have been carrying on as usual and awaiting the divorcee negotiations to begin.

'Some businesses, like DFS, have seen their share prices sell-off, amid fears that the weaker pound will squeeze consumer spending, but on the whole markets have been buoyant.

'With inflation on the rise people will be starting to ask for pay rises. If they do not get them the consequence will be slower levels of economic growth.'


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