To describe the budget as one favouring industry is `laughable’, according to Sandy Morris, of stock-broker ABN Ambro Hoare Govett: it spurred the pound’s value to close on three Deutschmarks – a rate at which British Steel could not trade profitably, said Morris.
`There is something seriously wrong when the pound trades at a rate that makes a loss-maker of Europe’s most cost-efficient steel producer,’ said Morris.
The City is worried about the strong pound damaging exporters’ profits. John Dean, of broker Albert E Sharp, said the full impact will not show until next year; until then, no profits estimate can be trusted.
`So long as the pound rises, people will expect it to rise still further, with share prices falling to match. They will see no reason to buy when tomorrow’s shares may be still lower,’ said Dean.
City forecasts for 1997 made this year assumed an exchange rate between DM2.60 and DM2.70. Brokers are sharply revising to take account of the current rate (DM2.95, as The Engineer went to press). Merrill Lynch has downgraded its expectation of Vickers by £6m and of IMI by £7m.
Prices of many of the sector’s exporters saw heavy falls, including GKN, Siebe, Rolls-Royce, TI Group, Smiths Industries, and LucasVarity.
Watchers warn that while the strong pound’s impact so far relates to translation, it will hit transactions as adverse exchanges make UK exporters less competitive.
The latest survey of the Midlands `industrial heartland’, by Professor David Storey and his team at the West Midlands Business School, reveals that 24% of manufacturer respondents rated the strong pound a major problem, against only 2% in the previous survey eight months before.
Dean thinks the overall tax package with its adverse impact on pension funds and (potentially) dividends is `negative’ for business despite the two-point cut in corporation tax.