long as decent growth can be maintained, but that is not the case at present. The Profit Watch UK’s second quarter report shows that UK plc revenues inched only 1.6% ahead between April and June, with a third of companies reporting lower sales year-on-year. The same report shows profits for UK companies rose 3.1% between April and June, yet only because they were puffed up by the weak pound, and propped up by above-average profit from the top 40 UK-listed multi-nationals. ‘Those outside the top 40 saw profits drop by a third, the fifth consecutive quarter of declines,’ Profit Watch UK says. More than half of companies reported lower profits thanks to a widespread and dramatic margin squeeze since 2007, meaning an extra £787bn of revenue only generated £16bn more in profit. MANAGING THE EARNINGS IMPACT Brexit bickering and parliament’s prorogue paralysis has left the Bank of England loathe to
FEW SECTORS HAVE MANAGED TO IMPROVE THEIR INDEBTEDNESS OVER THE LAST DECADE 10 yr avg
Current net debt/EBITDA
Source: Liberum, Datastream. NB Equal weighed. Chart is ranked by level or change in the last 10 years
raise rates and run the risk of plunging the UK into a damaging recession. Last week the Bank of England left its base rate unchanged at 0.75%, a decision widely anticipated by the markets as interest rate policymakers juggle keeping inflation in check versus stimulating growth. This gives the Bank of England room to cut rates in the event of a no-deal Brexit, but it has previously taken the view that a tightening of policy may be necessary post-Brexit.
LEVERAGE HAS CLIMBED TO PRE-FINANCIAL CRISIS LEVEL
If the Bank of England lifts the base rate, current levels of debt could weigh heavily on corporate earnings and share prices as companies bear increased costs of servicing debt. But there is little reason to panic now. ‘Considering UK plc’s debt pile in isolation doesn’t tell the whole story,’ says Link Market Services’ Michael Kempe. ‘Despite debts reaching new records, the measures of debt burden and sustainability are not yet stretched.’ He adds: ‘It’s really important to consider the burden of debt, and how sustainable it is as well. This is why the increase in borrowing in 2018/19 isn’t a cause for concern. ‘It’s well backed by assets, and easily serviced at present by the profits companies are making. There are companies and sectors under strain, but the overall picture is reasonably comfortable.’
Source: Liberum, Datastream. NB Equal weighed Net Debt/EBITDA for the FTSE 350 ex Investment Trusts
26 September 2019 | SHARES |
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