UK stock index above pre-vote level: Crisis over? Not likely

AP News
Posted: Jun 30, 2016 10:51 AM
UK stock index above pre-vote level: Crisis over? Not likely

LONDON (AP) — Don't be fooled: the rebound in Britain's main stock market to where it was before the vote to leave the European Union does not mean all is now fine for the country's economy.

The result of the vote, which plunged Britain into an existential crisis and opened up a chasm of uncertainties for businesses, saw the FTSE 100 index dive for two days before bouncing right back up.

The index, however, is a poor indicator for the U.K. economy, experts say, as many of its listed companies are multinationals that do most of their business outside the country and benefit from the pound's 10 percent slide since the vote. Shares in companies that depend on the British and European economies are still down sharply, as is the currency, reflecting deep concerns about the future.

"The U.K. is on course for a technical recession in the second half of this year," said Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics in London.

Investors will be looking ahead to a speech by Bank of England Governor Mark Carney later Thursday for reassurances as they face a panoply of risks.

Those include a drop in investment among businesses as it remains unclear what trade relationship Britain will have with the rest of the EU. Some have frozen hiring and issued warnings that their earnings will be lower than expected. Others are considering relocating some jobs to the mainland.

Some politicians have interpreted the FTSE 100's rebound as evidence that those concerns have been overcome and there is renewed optimism about the future, even outside the EU. The FTSE 100 rose another 0.2 percent on Thursday to 6,373, well above the 6,338 it traded before the vote's result was known.

But the index's performance is flattered by the fact that many of its listed companies earn much or all of their money abroad. With the pound down against other currencies since before the vote, including a 10 percent slide against the dollar, that means their earnings are due to be boosted, not hurt.

Oil companies BP and Royal Dutch Shell make their money in dollars, the currency in which crude is priced internationally. So when they bring that money back to Britain and translate it into pounds, their revenues will be higher.

Shares in BP and Shell are up 10 percent and 8 percent, respectively, since the vote — about as much as the pound has dropped, not coincidentally.

Other companies that have global operations will see their earnings made in other countries boosted when repatriated to the U.K. Fashion powerhouse Burberry, which has become popular in Asia, has also seen its shares rise since last week.

The global footprint that Britain's biggest companies enjoy will help them through the uncertainty and will help the British economy to a certain degree.

But beyond this clutch of companies, there is no question that Britain's companies are taking a hard hit. Companies that depend on access to the EU market, particularly financial companies, are down sharply. Barclays bank is down almost 30 percent.

The prospect of a looming recession could push house prices down. That has crushed shares in real estate companies like Taylor Wimpey, which is down 34 percent since the vote.

Another index of smaller, often more domestic companies, the FTSE 250, is down 8 percent. That includes companies involved in every aspect of the British economy — from property to retail, technology and services.

Retailer WH Smith, whose shops selling magazines, books and snacks are ubiquitous in British town centers, is down 9 percent. Auto Trader, which connects car buyers and sellers online, is down 17 percent as consumers are expected to have less disposable income in case of recession. Bakery chain Greggs is down 12 percent.