S&P 500 companies start facing up to the potential Brexit costs

SANFRANCISCO/NEWYORK: US companies, facing investors in their first earnings reporting season since Great Britain voted to leave the European Union, are broadly conceding that the so-called “Brexit” could weigh on profits.

Companies from General Motors to Yum Brands to FedEx say they do expect a hit, though it is too soon to tell how deep it may be or when it will come.

Wall Street investors were originally rattled by the Brexit vote and independent analysts have suggested it could cost US companies billions of dollars in earnings due both to currency factors and also to lost sales in Europe. Roughly 38 of 63 S&P 500 companies with quarterly conference calls since the end of June have talked about Brexit.

On Thursday, GM said it was considering cost cuts in Europe to offset up to US$400 million of potential headwinds triggered by Brexit.

“The result of the vote has adversely impacted the British pound and the uncertainty has put a strain on the UK automotive industry,” Chuck Stevens, executive vice president and chief financial officer told investors.

Delta Air Lines said last week it would reduce capacity on its US-UK routes as a result of the drop in the pound and increased economic uncertainty caused by Brexit.

FedEx Corp, in its annual report filed July 17, said Britain’s exit could result in a global economic downturn, which could depress the demand for its services as well as create new trade regulations. Consumer products company Helen of Troy also cited a potential negative currency effect.

S&P 500 corporations overall depend on Europe for eight per cent of their revenue, with just 1.9 per cent of revenue flowing from Britain, according to S&P Dow Jones Indices.

Companies that don’t see Brexit hurting their results now may change their tune as Britain’s separation from the world’s largest trade bloc unfolds over years, with Britain not expected to even begin the exit process before the end of 2016.

Ahead of the June 23 vote, economists had widely warned that leaving the EU could create global financial instability and an economic slump in Europe.

The vote resulted in an immediate selloff of global and US stocks and a rise in the US dollar against major currencies - a move that, if sustained, could hurt US exporters. Many now emphasize that the negative economic effects of Brexit will occur over years instead of months.

“My guess is that companies are sensing the same thing, and don’t know how to quantify it yet,” said Steve Chiavarone, portfolio manager at Federal Investors.

Brexit could cost North American and European companies some US$ 35 billion to US$ 40 billion over coming quarters in currency impacts alone, according to a report released this week by FiREapps. — Reuters