London £4 trillion stock market sees profit warnings hit financial crisis levels

Profit warnings issued by companies on London’s £4 trillion stock market surged over the last year, propelled by swelling costs squeezing margins, a new report out today reveals.

Against a backdrop of skyrocketing energy prices and slowing demand amid cost of living crisis, businesses have had to tell shareholders to brace for profits to come in under forecasts some 305 times over the last year, a 50 per cent increase from the 203 profit warnings issued in 2021, according to EY-Parthenon.

The company scrutinises the entire London Stock Exchange, which has over 1,190 companies worth around £3.8 trillion listed on it, for profit warnings.

In 2022, nearly a fifth of London’s entire stock market alerted investors of a profit shortfall, the same proportion during the financial crisis in 2008.

Nearly half, 152, of last year’s profit warnings were caused by swelling costs. 

Global energy prices touched record highs in 2022, turbocharging inflation in the rich world, with the UK suffering the worst bout of price pressures. Inflation hit a peak of 11.1 per cent, the highest level in 41 years, hobbling households and businesses alike. Those price increases have forced Brits to cut back on spending, heaping more pressure on companies’ margins.

Big consumer-focused firms were among the sectors with the highest profit warning tallies. Over one in three London-listed retailers sounded the alarm last year, up from a fifth, led by nearly half of FTSE retailers issuing a profit warning.

Earlier this month, cult-book maker Dr Martens issued a profit warning that caused its share price to tumble as much as a quarter.

Profit warnings can be disastrous for a company’s share price as they tend to trigger a sell off due to investors trying to contain their losses.

If a company says its profits will come in lower than what it previously forecast, it means dividends or share buy backs, both of which put cash back in investors’ pockets, could be cut, usually putting downward pressure on its shares.

Intensifying cost pressures have also been made worse the Bank of England’s nine successive interest rate hikes to tame rampant inflation.

While kicking borrowing costs higher is necessary to attack price pressures, it wreaks havoc on companies who rely on credit to finance day-to-day spending. 

Higher rates can cut off a key source of finance for businesses, raising the risk of a jump in insolvencies. Existing debt also becomes more expensive to repay.

Experts warned C-suite executives to start drawing up plans now to ensure they can survive amid the credit crunch.

“Companies need to ensure they are scenario planning and have a clear understanding of how their business will adapt under different conditions, particularly as accessing capital to plug funding gaps is becoming harder,” Jo Robinson, EY-Parthenon partner and UK&I turnaround and restructuring strategy leader, said.