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UK stock market just shy of record high as pound drops

By on October 4, 2016

LONDON — British stocks fell agonizingly short of an all-time high on Tuesday as optimism grew that the country’s exporters and multinationals will benefit from the pound’s slide to another 31-year low against the dollar.

The pound has taken a dive this week amid concern the country is willing to break away definitively from the European Union’s single market.

The pound, which traded around $1.50 on the day of the June 23 vote to leave the EU, was at $1.2745 on Tuesday, down 0.8 percent on the day, after a key speech over the weekend by Prime Minister Theresa May.

Pedestrians pass a money exchange bureau in London, Tuesday, Oct. 4, 2016. The British pound has hit a 31-year low against the dollar amid concern the country is willing to break away definitively from the European Union's common market. (AP / Kirsty Wigglesworth)

Pedestrians pass a money exchange bureau in London, Tuesday, Oct. 4, 2016. The British pound has hit a 31-year low against the dollar amid concern the country is willing to break away definitively from the European Union’s common market. (AP / Kirsty Wigglesworth)

That’s its lowest level since June 1985, when Margaret Thatcher was British prime minister and London was readying for Live Aid.

The pound is also suffering against the euro, which is used by 19 countries in the EU. According to financial information provider FactSet, the pound is at a five-year low against the euro.

The pound’s descent since June means the country is less well-off — British tourists visiting Disneyland in California or Greek islands would have had less purchasing power.

But the country’s stock market is loving it, with the main FTSE 100 index at one stage trading less than a point from the record of 7,122 set in April 2015. The index closed up 1.3 percent at 7,074.

The rally is due to the fact that the drop in the pound, while a drag on consumers’ and businesses’ spending abroad, is potentially good for those British firms that already have huge business interests outside the U.K. And there are a lot of them listed on the FTSE 100.

Exporters will see their goods become more cost competitive in international marketplaces, especially while the country remains within the EU. And the money they make abroad will be worth more when it is brought back to the headquarters in the U.K.

Fashion house Burberry, which sells heavily in the U.S., Europe and Asia, has recently said its earnings have been boosted by the fall in the pound while warning of challenging times ahead.

Pearson, the education publisher, makes a lot of its money in dollars, and was one of the top risers on Tuesday. It’s the same for miners and oil firms like BP and Royal Dutch Shell, whose products are denominated in dollars.

“The reality is the biggest stocks in the index dominate its performance, and the likes of HSBC, Royal Dutch Shell, and British American Tobacco all have international earnings which are now worth more in pounds and pence thanks to (the pound’s) decline,” said Laith Khalaf, senior analyst at Hargreaves Lansdown.

Pound and Euro signs are seen above a cashpoint in London, Tuesday, Oct. 4, 2016. The British pound has hit a 31-year low against the dollar amid concern the country is willing to break away definitively from the European Union's common market. (AP Photo/Kirsty Wigglesworth)

Pound and Euro signs are seen above a cashpoint in London, Tuesday, Oct. 4, 2016.  (AP / Kirsty Wigglesworth)

It’s not just the big exporters seeing a rise in their shares this week. Even smaller British companies focused on the local economy are gaining thanks to recent upbeat economic indicators and the central bank’s recent move to cut interest rates.

That’s a marked change from earlier this summer, when domestically-focused companies were seeing their shares dive on concern about an economic recession that never materialized.

The latest drop in the pound was triggered by comments over the weekend by May, who replaced David Cameron as prime minister in July.

She fleshed out some details over how the country will leave the EU, saying she will invoke by March the so-called Article 50 of the EU treaty, the move that will officially start two years of talks on Britain’s exit.

She also appeared to signal that her government would prioritize controls on immigration over access to the European single market, an approach informally called a “hard Brexit.”

It remains unclear, however, what the negotiations will ultimately bring for the British economy.

“The truth around Article 50 and a ‘hard Brexit’ is that nobody really has any idea what the outcome or repercussions will be,” said James Hughes, chief market analyst at GKFX.

“So for the markets, it is the utter uncertainty that is causing the volatility and downside movement for the pound, and not any kind of factual information or informed guess work.”

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