In fact, the weak pound has already delivered the equivalent of a rate cut.

Pound Outlook : head of the expected Bank of England interest rate cut this Thursday, the FT has a really interesting story on UK companies actually benefiting from the drop in the pound. If the Bank of England were to cut by more than the built-in 50 bp, it would boost stocks because of a currency effect. In fact, the weak pound has already delivered the equivalent of a rate cut. “A rough yardstick suggests that every 10 per cent fall in the pound against the US dollar exchange rate equates to 25 basis points in monetary easing due to the beneficial effect on exporters and the pressure it takes off domestic manufacturers at home.”

An astounding 41% of the FTSE 100 (market cap) report earnings in dollars, incuding oil companies, minign companies, banks and some pharmaceuticals. “Calculating an Foreign exchange related rule of thumb for earnings is tricky, given the lack of information about the denomination of companies’ cost bases and financing requirements. However, for dividends it is much more straightforward: every 10 per cent fall in the value of the pound to dollars adds nearly 4 per cent to UK dividend growth, all other things being equal. “

On the other hands, “JPMorgan estimates that adverse foreign exchange movements have pushed annual UK retail inflation up from 7.7 per cent in June to 10.5 per cent. Retailers may try to pass on these increases to maintain margins. However there is every chance that, in a deflationary world, consumers will respond by trading down or buying less. This puts retailers such as Next in the firing line due to the comparatively high prices they charge. However, on balance, sterling’s weakness should be a boon for UK stocks, albeit a limited one given the air of gloom surrounding global asset markets.”

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Barbara Rockefeller
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