HomeBlogFinanceUK business from airlines to brewers braced for higher costs as sterling falls

UK business from airlines to brewers braced for higher costs as sterling falls

British companies from airlines to brewers were braced for higher costs after the turbulence of sterling on Monday, with the prospect of an accelerated rise in interest rates also weighing on industries such as housebuilding.

Sectors including retail, hospitality and aviation are affected by the falling pound — which hit a record low against the dollar on Monday morning — as imports of commodities and goods become more expensive for many companies already facing a crisis of rising costs.

“The dollar is very, very strong . . . and it has an effect,” said easyJet chief executive Johan Lundgren. “We have lots of expenses in dollars and we have revenues coming in pounds.”

About 40 per cent of airlines’ operational costs are in dollars, including jet fuel and maintenance — although many hedge their currency exposure and their future fuel requirements. Lundgren said easyJet was “one of the best hedged airlines”. 

Other companies, from the UK’s largest banks to drinks manufacturers, will also be affected, in a sign of how widespread the hit will be.

Paul Davies, chief executive at Carlsberg Marston’s Brewing Company, said: “Many of the hops used in this country are imported . . . particularly from the [United] States. Changes in currency is worrying for our industry, for sure. People drink a lot of imported beers from Europe [too].”

If the pound stayed at these levels, he told the BBC, “things will rise . . . If you are drinking a double IPA that requires a lot of hops from the States, at some point that has to get passed through to customers.”

Miles Beale, head of the Wine and Spirit Trade Association, said: “While the headlines on Friday were meant to be about the laudable freeze to alcohol duty, the pound tanking against the dollar has both usurped them and delivered a significant blow for UK wine businesses and consumers.”

Kate Nicholls, chief executive of UKHospitality, which represents pubs, restaurants and hotels in the UK, noted that 60 per cent of the sector’s food and drink produce was imported and was also affected by commodities prices in euros or dollars. “So, for example, milk is sold and priced on global markets in euros and coffee in dollars. Even though we are self-sufficient in milk, the price is still affected by currency. This will be the case for lots of homegrown goods,” she said.

Hong Kong-listed shares in HSBC and Standard Chartered, two UK-based banks that are also traded in London, fell by more than 7 per cent on Monday as Asian investors responded to the sharp sell-off in sterling.

HSBC, which has 25 per cent of its loan book in the UK, has previously guided the market that a 5 per cent depreciation in sterling or the euro compared with the US dollar could decrease its equity by $3bn, or 1.7 per cent of its book value at the end of last year.

Analysts at Citi estimated the falling pound on Monday could weigh on HSBC’s revenues by $1bn and its operating expenses by $900mn, causing a $100mn drop in its pre-tax profit.

In London, HSBC’s shares had dropped 1.9 per cent by mid-afternoon. Domestic-focused lenders were hit harder, with Lloyds falling 2.9 per cent, NatWest down 3.8 per cent and Virgin Money dropping 6 per cent as the prospect of further sharp interest rate rises grew.

Smaller businesses, which are less likely to have in place hedges against currency movements, also expressed alarm about the lack of stability.

Danny Hodgson, who owns London-based clothing retailer Rivet & Hide, said it was not just the dollar that caused problems. His bigger difficulty was the fall against the yen, as he imports denim from Japan. “I am much more worried as the pound has lost against the [yen] and we have £400,000 of [yen] orders on the books,” he said.

“As a business owner I much prefer to be in a strong position as a buyer of foreign goods with a strong and stable currency. Business needs pragmatism, not ideology, and when this budget based on fantasy economics was delivered on Friday I did not cheer it in spite of the lowering of both my personal and business tax liabilities. It was pretty obvious to me that we would be paying for this giveaway within days.”

The FTSE 250 index, which has more domestic companies than the internationally focused FTSE 100 and so can be a better indicator of the UK economy, continued its fall on Monday. The index has dropped almost 6 per cent in the past five days.

Sharon Bell, head of UK portfolio strategy at Goldman Sachs, said the surprise was the fall in the FTSE 100, where many international companies earn and pay dividends in dollars but are traded in sterling, which should make them attractive.

“There’s clearly a risk premium being put on UK assets more broadly, which we haven’t had in the past,” she said, adding that there was extra pressure on companies that were more exposed to interest rate rises such as real estate or that acted as bond proxies in utilities.

Shares in Barratt Homes, Persimmon and Berkeley Group were down more than 4 per cent on Monday morning.

Roger Lee, Investec’s UK strategist, said forward-looking markets were pricing in mortgage rates of more than 6 per cent, which he described as “very difficult” for the housebuilding market.

Analysts also raised concerns over the construction supply chain. Mike Prew at Jefferies said: “The price of steel is going to be the thing that hurts you, and the recent depreciation of sterling is going to exacerbate that. The major impact will be on Landsec and British Land, which have big development pipelines.”

A quarter of construction products are imported, according to the Construction Products Association, which will be affected by the depreciation of sterling. Noble Francis, economics director at the CPA, said that the remainder would often use energy fuel or input materials that were produced abroad or priced in dollars.

However, sectors where companies sell to the US are likely to benefit from a weaker sterling.

Shares in BAE Systems, which is expected to benefit from the increase in the sterling value of its US profits, rose more than 2 per cent. Dollar-earning consumer staple companies such as Unilever and British American Tobacco also climbed.

Roddy Davidson, head of research at Shore Capital, said companies in his coverage with a “favourable tail wind” given significant dollar earnings included WPP, Informa, Future and Pearson.

Businesses with larger US businesses such as Burberry, WHSmith, Watches of Switzerland and JD Sports could also stand to benefit.

Six carmakers with UK plants told the Financial Times that hedging meant they would face little immediate cost impact. Yet leading industry figures also warned that any sustained fall in the value of the pound raised the overall cost of doing business in the UK — making it less attractive for international businesses such as Toyota or BMW in the long run.

Other parts of the industry could gain. Luxury names such as McLaren and Aston Martin buy many of their parts in euros but sell large numbers of cars to the US, making their exports more competitive.

By Daniel Thomas, Philip Georgiadis, Peter Campbell, Abby Wallace, Owen Walker, George Hammond, Sylvia Pfeifer and Jonathan Eley

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