Tourists to Boost U.K. Stocks Where Squeezed Residents Fail

Tourists flocking to a Britain made cheaper since the Brexit vote could be the bright spot for the country’s stock market in 2017.

While tourists get more bang for their buck with the pound well below its level before last year’s referendum versus most major currencies, a pickup in inflation is squeezing the income of residents. Shares of companies that count on spending by visitors are “highly likely” to outperform those reliant on domestic consumers, according to Caroline Simmons, deputy head of the U.K. investment office at UBS Group AG’s wealth-management unit.

Bank of England President Mark Carney warned on Thursday that U.K. households are facing a “challenging” period, as wages won’t keep up with the prices of goods and services. By contrast, sterling’s slide of about 14 percent against the dollar since June 23 has boosted spending by overseas visitors in early 2017.

“The U.K. domestic consumer is coming under increasing financial pressure,” Simmons wrote in a note on Thursday. Inflation in 2017 “will outpace gains in British consumers’ wages, generating a ‘Brexit bite’ on disposable income. Tourism stocks are one outlet for investors looking to avoid this risk.”

Luxury stocks and entertainment companies will beat those focused on high street retail, home improvement and casual dining sectors, UBS Wealth wrote. Profit at some tourism-related firms could grow 10 percent this year while shares exposed to the domestic economy will disappoint with flat earnings, according to the note that didn’t specify stocks by name.

Among companies citing a favorable tourism impact is Merlin Entertainments Plc, which said in March it’s “encouraged” by European visitors to its attractions in the British capital driven by a competitive exchange rate. Shares of the operator of the London Eye and Madam Tussauds wax museums are up about 16 percent since the referendum, benefiting both from a currency boost from overseas properties and an increase in U.K tourism. British luxury stocks including Burberry Group Plc have also gained in the period.

Shares with greater reliance on U.K. revenue have underperformed those more exposed to global sales amid the plunge in sterling. The FTSE Local U.K. Index, a measure of companies that rely on the domestic market for most of their sales, dropped 0.7 percent on Friday. The larger FTSE 100 Index added 0.2 percent.

Overseas residents made 15 percent more holiday visits to the U.K. in the three months through February, compared with the same period last year, the Office for National Statistics said in a report last month. In February alone, tourists spent 1.2 billion pounds, or 6 percent more than in the same month in 2016.

Meanwhile, there are more woes in store for companies reliant on domestic spenders. In the latest Inflation Report on Thursday, the Bank of England warned of a slowdown in first-quarter economic growth and pressure on consumers from rising prices. Retail sales are falling as the weaker currency pinches pockets, while the bitter tone of the lead-up to Brexit talks could cast a further cloud on consumer confidence.

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