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Abu Dhabi, UAEWednesday 12 December 2018

'In the money' UK CEOs mask reality for their firms

Once you strip out the currency effect, many companies' performance looks less stellar

Laughing all the way to the bank. Mike Coupe, chief executive of Sainsbury's, like many British CEOs is raking in the cash but some of their firms are doing less brisk business. Chris J Ratcliffe/Bloomberg
Laughing all the way to the bank. Mike Coupe, chief executive of Sainsbury's, like many British CEOs is raking in the cash but some of their firms are doing less brisk business. Chris J Ratcliffe/Bloomberg

The sight of J Sainsbury chief executive 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.

UK 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 UK's benchmark FTSE 100 Index was 12.6 per cent last year, according to data compiled by Bloomberg - well ahead of comparable growth posted by peers in Japan, Germany, the US, and France. Chie executive pay, meanwhile, was up 25 per cent 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 UK but which do a lot of business elsewhere.

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

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

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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. UK 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 per cent 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 Office of National Statistics (ONS) figures.

And this came after a lost decade that saw UK 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 UK 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 UK 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's decision to sell Asda to Sainsbury. The deal prompted Coupe to break out in song on UK 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.

Bloomberg