How the FTSE 100 is being undermined by the strong pound

Michael Bow
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The mood music for the British economy has been sounding all the right notes this year.

But one section of the business community are not tapping their feet – stocks listed on the UK’s top share index the FTSE 100.

According to a new note from investment bank Deutsche Bank, business analyst have revised down their estimates of future earnings by FTSE 100 companies by the biggest margin in Europe.

Since the turn of the year, they've slashed consensus earning estimates on the index by 7.2 per cent. Even Italy, Spain and the rest of Europe appear to have a more compelling earnings story than the FTSE 100, suggesting the blue chip index could be in for a rougher ride than forecast over the next 12 months.

Oddly, the stronger UK economy is eating away at the nation’s blue chip share index.

Strong job figures and a bullish growth outlook have caused the pound to strengthen dramatically against the dollar, with the pound recently hitting a five year against the dollar.

This is bad news for the FTSE 100. Over half of its net income is reported in dollars, and it has a very strong exposure to the global economy.

Burberry has already warned that the exchange rate will hit 2014 full year earnings. And the Deutsche note says there are more victims.

“The main culprits are telecom (and the substantial earnings loss at Vodafone due to VZN) and oil & gas, but on looking at the stocks registering the biggest downgrades over the month it spans food retail, mining and banks. The top five contributors to the decline in the FTSE’s 2014 earning per share over the month are Rio Tinto, HSBC, BP, Tesco and Glencore Xstrata.”

The growing strength of the UK economy and the pound has yet to stir real concerns among politicians and policymakers.

Its impact on the more domestically focused FTSE 250 could be one reason for this, with estimated earnings per share for the next 12 months forecast to be up 3.5 per cent on the index compared to an 11 per cent fall for the FTSE 100, as this graph demonstrates.

But if the stronger pound starts to really eat into FTSE 100 profits, then there could be more voices in the City calling for action to stem the impact of the UK’s stronger economic growth.