Investors should brace for slew of UK company profit warnings

With a worsening global macro outlook, this expert fears some absolute howlers from UK businesses.

Investors should brace themselves for a series of profit warnings from UK listed stocks, Smith & Williamson Investment Management's Mark Swain has warned.

According to Swain, a worsening global macro-economic environment is currently unfavourable to UK businesses, and its impact could soon start to be seen in UK stock prices.  

He identifies the poor macroeconomic data coming out of the US, China and Europe, especially in manufacturing. 

In the US, for example, while GDP growth figures have been relatively strong, much of that growth has been the result of increased consumption. The country's manufacturing sector has contracted for the past three consecutive months. 

Meanwhile, eurozone manufacturing firms recorded a ninth successive month of declining production and Chinese manufacturing figures are at an eight-month low.

This weak macroeconomic backdrop will soon start affecting the fortunes of UK companies. "The data that is coming out now in terms of PMIs and other readings means it is likely we will get some big profit warnings in the final quarter of 2019," Swain says.  

Swain identifies the UK's manufacturing and industrial sectors as most at risk, noting that both sectors contain "plenty of names which look over-stretched in terms of the valuations they currently command".

Swain points out that some of the companies are still trading on price-to-earnings ratios of 25 times or higher. As a rule of thumb, a PE of above 15 is generally considered expensive. 

This means that any companies that do issue profit warnings or miss expectations could see a dramatic decline in price. 

Swain says: "Some of these businesses - be they manufacturers, capital goods or industrials - are very highly rated by investors, and if they warn on profits it could be a very sharp de-rating.

"In short, we think there could be some absolute howlers out there, and we think these are the sectors where the pain will really be felt as we move through the fourth quarter." 

However, it is not all negative news for the UK market. Swain argues that a combination of sterling's continued weakness and cash-rich foreign companies could lead to an uptick in merger and acquisition (M&A) activity. 

"The UK is still home to very good companies, and we expect M&A to be a key theme as a result," Swain says. 

"There lots of positives from the perspective of overseas buyers, not least the weak pound. Even at $1.28, the pound is way down on pre-Brexit levels. Quality UK companies are therefore very attractive to overseas buyers now."

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