Actual economic effects...

[Spinflight]

FTSE closed on Wednesday at 6138. Closed on Friday at 6138.

Long term borrowing rates have come down as brexit appeared more likely, 10yr ones from 2% down to 1.09% post brexit. Similarly all the European long term borrowing rates rose sharply. Lesson? We are a less risky and more credit worthy outside the EU than in.

One ratings agency did drop our credit worthiness, though oddly the last time they did was out of fear of Eurozone contagion. Seems completely at odds with the long term borrowing rates, which matter quite a great deal given our debts.

The pound dropped, quite significantly. It appears however that there was some 'unusual' activity in the market which forced it down whenever the Leave campaign polled well. To the extent of trying to sell it when there were no buyers.

Some people lost a great deal of money, probably dwarfing the millions contributed to the remain campaign, lets hope it was Goldman Sachs and JP Morgan. :)

Exactly my point cote, the imported materials going into pharmaceuticals is negligible. So a falling pound won't hurt Pharma production much. Could be why GSK announced further investment in the UK last week?

Sorry, from whatever arguments your making, I just can't justfiy the fact that a massive devaluation in the pound is a good thing. Especially not when the PED for our exports is inelastic.

What ever way you try to twist it, and I agreed that there will be some benefit to manufacturers, but the increased costs of raw materials will also effect them!

GSK was good news, I'm surprised that more people on here didn't make more of it!

Ellly & Larry - You didn't understand what I said. Investments and intellectual property are not Income Statement items. They don't figure in CGS (cost of goods sold). That means they have no impact on profit calculations at all.

I did understand Cote. This is the whole point.

EllyMayClampett

Indeed so. Medicines mostly cost peanuts to make, it is how to make it that is expensive (and protected by patent laws).

CoteDAzur
Most medicine exports will be in EUR or USD. So selling a medicine that cost $10 per use and cost 20p to make will now yield a profit of ($10 / 1.3 = £7.69 - £0.20 = £7.49 vs £6.67 - £0.20 = £6.47 previously). ( There will be logistics and distributional cost, left out for simplicity).

GSK and AZN stock prices have gone up significantly.

Cote,

Don't confuse disagreement with lack of understanding.

I think Topsy has explained it v well so I won't elaborate further.

"There will be logistics and distributional cost, left out for simplicity"

Nah, you left them out because they increase with the devaluation of the pound!

"Don't confuse disagreement with lack of understanding"

You can't disagree with accounting principles, larry.

Elly said "Surely in Pharma production the physical inputs are small and the intellectual property is great." and I replied "Intellectual property is an asset (in the Balance Sheet) not a Cost of Goods Sold (in the Income Statement)".

If you don't understand what that means, I can try to help you. Basically, it means Elly is wrong because assets like intellectual property are not costs items and hence don't influence profitability.

Feel free to "disagree" with accounting principles, though

" selling a medicine that cost $10 per use and cost 20p to make "

It's kind of cute that you think net profit margins in pharma are 98%

Example: Merck's 2015 net profit margin was 11%. That means, in the simplistic way that you look at things, a medicine that sold for $10 cost them $8.9 to make.

It also ignores the energy used to manufacture them, the cost of which will increase.

So to confirm:

Raw materials negligible, but may be increased due to the need to import.

Energy costs up

Transport cost up.

So there are increased costs :)

Facts eh, lovely .

Anyway, pharmaceuticals are UK's 5th largest export industry. The first three largest export products are Industrial Machinery, Oil & Mineral Fuels, and Motor Vehicles & Parts.

Prices of their raw materials are quoted in USD and are now about 10% more expensive. Is anyone interested in arguing that raw material costs are a tiny part of cost structure in these industries?

Cote, I think Topsy knows, as I do, that research costs are the main costs for a pharma company. Those costs are primarily salaries and labs here in the UK. Costs which the companies pay in GBP, while their sales are global.

These threads are boring and uncivil if we purposely misunderstand one another.

We would understand each other better if you used the proper terms.

R&D (Research & Development) are large cost items, although not necessarily the largest. For example, Merck's Selling, General & Administrative cost item in its Income Statement for 2015 was more than 50% higher than its R&D item.

Intellectual property (which was what you said, see below) is not a cost item. It is an asset and figures in the Balance Sheet, not the Income Statement.

As I said before, you had not understood what I was talking about.

EllyMayClampett Sun 31-Jul-16 12:09:06
I understand the high material inputs for Cars, but not Pharma. Surely in Pharma production the physical inputs are small and the intellectual property is great.

Small and cote,

I don't think anyone argued about costs being up. If so, maybe you could point me to the post?

However if the costs which are up are 20% of your selling price (quite a high estimate) and gbp devalues 10%, your product now costs 2% more to make (10% of 20%), so costs 102%. Your selling price (assuming a profit margin of 20%) goes up from 120% to 132%. So your profit margin has gone from 20% to 29%. This gives you the luxury of cutting your costs to increase volume or using the excess profit for further investment.

Please explain the flaw in the above argument, if you feel there is one? I think, Cote, the you know EllieMay was talking about production costs being mainly research. This discussion is about the benefits of devaluation to exporters, not accounting principles. Pedantic nit picking merely demonstrates a lack of a coherent substantive argument.

Should have said costs which are up are 20% of total costs. But even if 20% of selling price, only makes a small difference.

Please explain the flaw in the above argument, if you feel there is one? I think, Cote, the you know EllieMay was talking about production costs being mainly research. This discussion is about the benefits of devaluation to exporters, not accounting principles. Pedantic nit picking merely demonstrates a lack of a coherent substantive argument.

This whole discussion is based on pedantic nitpicking. Every company and every industry will be affected diffetently so to try and base overarching effects being either positive or negative on discussion of specific and obvious industries via the really standard, old fashioned import/ export model lacks substantive argument.

We cannot determine via discussion on mn whether the effect on UK business is positive or negative. Devaluation like everything else has advantages and disadvantages.

Basic,

If you take that view, we certainly cannot determine on MN whether Brexit is positive or negative.

Yes I agree with that Larry in part. No one knows what will happen in the future and therefore the long term effects.

I think the Economic shock aspect makes it negative in the short term. It will remain to be seen to what extent though and we can't answer that.

Basic,

Again, I don't think anyone is disputing it is short term negative. However, devaluations (if they are contained) are nearly always short term positive. Our exit from the ERM is a comparable example (although clearly there are also differences).

Sorry, from whatever arguments your making, I just can't justfiy the fact that a massive devaluation in the pound is a good thing. Especially not when the PED for our exports is inelastic.

I just need to pick up on one thing here and participate in the nitpicking. The elasticity of our exports is irrelevant. The only important thing is that the business understands its market and products so it can set price accordingly.

So price elastic = UK producers reduce price and sell proportionately more. So make more money out of sales.

Price inelastic = UK producers leave the price the same but get more £ back and therefore make more money out of sales.

Scenario 2 is one reason why the FTSE100 has done better than expected since the vote.

There is no doubt that Brexit has been negative for the UK economy, at least in the short term. You can see this in GBP's rapid depreciation, quick erosion of confidence index, not to mention rating agencies downgrading UK, to mention a few signs & symptoms.

It might be OK in the long term and UK might indeed thrive outside the EU, but short term effects have clearly been negative and caused an abrupt slowdown as reported from diverse sectors like construction and car manufacturing. And that after 0.4% GDP growth in 1Q and a stronger 0.6% in 2Q, boosted by the best industrial sector performance in nearly 17 years.

And now BoE is expected to cut interest rates to an all-time low of 0.25% next week. That would not have been necessary if not for Brexit, as growth was healthy and economic forecasts were optimistic in 1H2016.

You can't say you were not warned, either, as even BoE (among many others) came out and said that if Brexit won that could mean recession. But apparently that doesn't mean as much to many British people as seeing less Muslims and Eastern Europeans in the UK, so hey ho.

Now all we can do is cross our fingers and hope that trade negotiations and other legal framework can be magicked quickly so that Britain can indeed be open for business soon. "Quickly" of course still means years, so better brace yourselves for an unpleasant economic climate in the near future.

Again, I don't think anyone is disputing it is short term negative. However, devaluations (if they are contained) are nearly always short term positive. Our exit from the ERM is a comparable example (although clearly there are also differences).

We rely very heavily on imports and more so and for whole industries than back in the day. Plus in the ERM the pound was massively overvalued as a deflationary measure to control inflation that was endemic at the time. You can't transpose that onto Brexit and 2016.

"Scenario 2 (price elasticity re UK producers) is one reason why the FTSE100 has done better than expected since the vote"

FTSE 100 is made up of large corporations with diverse revenues in different currencies (all of which went up against GBP). That is why FTSE did well after Brexit - because their revenues will do better in GBP terms even if they sell the same number of units as in the previous year.

Price elasticity inelasticity

Yes exactly cote.