Record U.K. Profits Are Nothing to Sing About 

(Bloomberg) -- The sight of J Sainsbury Plc CEO Mike Coupe singing "we're in the money" neatly sums up the dichotomy between those feeling the pinch from Brexit and those who aren't.

U.K. corporations have rarely been this flush. They reported record pretax profits in the first quarter, according to the Share Centre, a broker. Average revenue growth for members of the U.K.'s benchmark FTSE 100 Index was 12.6 percent last year, according to data compiled by Bloomberg -- well ahead of comparable growth posted by peers in Japan, Germany, the U.S., and France. CEO pay, meanwhile, was up 25 percent on average. All but one FTSE 100 CEO earned more than $1 million, whether their pay rose or fell.

This is not "despite" Brexit, but in large part because of it. 

The pound's weakness, a by-product of sinking confidence in the economy after Brits voted in 2016 to leave the EU, has been a boon for companies based in the U.K. but which do a lot of business elsewhere.

Once you strip out the currency effect, many companies' performance looks less stellar. Caterer Compass Group Plc's 15 percent rise in sales in 2017 reduces to 4 percent, industrial supplier Ashtead Group Plc's 25 percent rise becomes 10 percent, and conglomerate Smiths Group Plc's 22.5 percent rise becomes a 3 percent contraction.

About 30 percent of FTSE 100 companies' revenue comes from the U.S., according to Bloomberg estimates. It's even more, at 35 percent, for the FTSE 250, although the data is patchier. 

All this serves to flatter performance, stock prices and, ultimately, make bonus targets easier to hit. Research by the CFA Institute shows earnings-per-share growth and total shareholder return are the most popular remuneration metrics for FTSE 350 firms and, while some companies make clear where currency effects are being excluded, others do not. U.K. pensions advisor PIRC says it has seen no firm adjust its executive remuneration targets to take sterling's weakness into account.

The rewards aren't being shared equally. The average Brit is faring less well. Again, not "despite" Brexit, but because of it.

The weak pound has raised the cost of imported goods -- consumer price inflation climbed to 3.1 percent in November 2017, the highest in five and a half years -- while average pay has struggled to keep pace. There was zero growth in real wages in 2017, according to ONS figures.

And this came after a lost decade that saw U.K. real wages fall the most among OECD countries bar Greece. It's no surprise consumer confidence among Britons hit a four-year low in December. By April this year, retail sales had posted the sharpest decline since the British Retail Consortium began its survey in 1995. Brexit is no boon.

Some might say this is optically unfortunate, a blip that could be reversed at any time. These are exogenous factors, after all -- shouldn't the smooth of currency moves be taken with the rough? 

Perhaps, but the problem is that the truly economically damaging effects of the Brexit vote can't be shrugged off. Pressure on the U.K. economy is likely to keep central bankers and politicians cautious; low interest rates and the extension of housing-market subsidies have kept first-time buyers off the property ladder and executives egregiously well-paid.

In the meantime, companies are being incentivized to invest elsewhere: the value of takeovers of U.K. companies by overseas buyers fell by a fifth in 2017 from the previous year.

That retreat is still producing money-making opportunities for those at the top: witness Walmart Inc.'s decision to sell Asda to Sainsbury. The deal prompted Coupe to break out in song on U.K. television, but his staff and customers are wondering what the impact of lessened competition and fewer stores will be.

In this environment, investors and executives need to remember that not every Brexit trade is in the money.

To contact the author of this story: Lionel Laurent at llaurent2@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.

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