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By Guy Faulconbridge, Jamie McGeever and David Milliken
LONDON, Oct 5 (Reuters) - Sterling has tumbled to a 31-yearlow, but British stocks are near a record high and, contrary tomany expert forecasts, the shock of Brexit has not pushed theBritish economy off a cliff.
So what gives?
Depending on which part of the financial universe you lookat, the outlook for UK Plc following the June 23 vote to leavethe European Union can appear equally bright or bleak.
Sterling's plunge makes Britain's exports more competitiveon global markets and is therefore a boost for economic growth.But if sustained, it will fuel inflation and become a source ofworry at the Bank of England.
How does the rest of the world measure Britain's standing asit prepares to divorce from the EU? Which is more telling: thesteep decline in the currency's value, or the recovery in thestock markets and competitiveness?
Below is a guide to what has happened across UK markets andthe economy since the Brexit vote, what lies ahead and what itmeans for Britain.
For full coverage click on the Brexit page: http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=brexit&navid=15301
For a weekly round-up of Brexit news: http://share.thomsonreuters.com/assets/newsletters/Specialpackages/Brexit_September29.pdf
WHAT HAS THE IMPACT BEEN SO FAR?
- CURRENCY: Sterling, which traded as high as $1.50on June 23, fell below $1.27 for the first time since June 1985on Tuesday, and sank further on Wednesday to hit a new 31-yearlow.
Sterling also fell to a 5-year low against the euro at 88.42 pence and a 7-year low against a basket ofcurrencies of Britain's main trading partners after a 13percent depreciation since the Brexit vote.
Currency traders have shunned the pound on fears overBritain's highly uncertain economic future, and the Bank ofEngland's decision after the referendum to cut interest ratesand inject more bond buying stimulus into the system.
- SHARES: Britain's FTSE 100 index rose above the7,000-point level for the first time since mid-2015. Theblue-chip index has risen more than 11 percent since itspre-Brexit level - and almost 20 percent from its post-Brexitlow - and has come within a whisker of its historic high of7,122.74.
The FTSE 250, which measures the value of smallerand more domestic-focused firms, hit a record high of 18,607points this week and is up more than 20 percent from thepost-Brexit low of June 27.
The rally in stocks has been fuelled by the BoE's policyresponse and the slump in sterling. A weaker exchange rateboosts the earnings of companies with global operations, andaround 75 percent of FTSE 100 firms' earnings are derived fromabroad.
By contrast, in dollar terms - which is how non-UK investorsmeasure their results - the FTSE 100 is still 5 percent lowerthan it was the day of the referendum and the FTSE 250 is down10 percent.
- BONDS: British government gilt prices have leapt to arecord high on the back of the BoE's decision in August to cutrates to a new low of 0.25 percent and restart its quantitativeeasing programme with a planned 60 billion pounds of purchasesspread over six months.
Benchmark 10-year gilt yields reached anall-time low of 0.503 percent in mid-August - down from morethan 1.3 percent before the vote - but have since pulled backand stand at just over 0.8 percent.
- MONETARY POLICY: The Bank of England cut rates on Aug. 4 to the lowest in its 322-year history and unleashed billions ofpounds worth of extra stimulus.
WHAT LIES AHEAD?
STERLING
The pound is likely to remain extremely sensitive tostatements from Prime Minister Theresa May, her ministers andEuropean leaders on how the Brexit process unfolds.
Lawmakers from PM May's ruling Conservative Party say thefall in sterling has made Britain more competitive, but manyfinancial market analysts say it reflects the negative view therest of the world has of Brexit Britain.
The next major step in the Brexit process will be when Maysends, by the end of March, a formal notification to the EU thatBritain is preparing to leave, invoking Article 50 of the EU'sLisbon Treaty. That starts a two-year negotiating window beforethe United Kingdom should leave.
Still, politics could intervene: the U.S. presidentialelection takes place on November 8, Italy faces a referendum onDec. 4, France holds a presidential election on April 23 and May7 and Germany holds an election in September 2017.
Just because the pound has fallen sharply in the last threemonths, there's no reason it should automatically recover. Someanalysts say $1.20 could be tested in the coming months.
BoE deputy governor Ben Broadbent said on Wednesday thatsterling's decline has so far been "pretty orderly, actually"and reflected markets' longer-term judgements about Britain'seconomy.
STOCKS
Central to Britain's stock market direction in the comingmonths is the exchange rate. As long as the pound remains weak,equity valuations will be revised higher. If you take the viewthat sterling will remain weak, earnings will be higher.
UK stocks are trading in a binary fashion - sterling falls,stocks rise. And vice versa. There is no sign of a "buyers'strike" hitting UK stocks or bonds right now because the BoE ishappy letting the pound take the strain as it boosts exports,and helps narrow the trade and current account deficits.
The exchange rate moves also make British companies moreattractive takeover targets for foreign firms, potentiallyfuelling a mergers and acquisition wave that would boost thevalue of UK shares.
But if, in the words of BoE governor Mark Carney, a countrydepends on "the kindness of strangers", you have to be carefulabout your currency. There may come a point when foreigninvestors take fright at sterling and stop buying UK assets.
A Reuters poll of around 30 traders, fund managers andstrategists this week predicted that the FTSE 100 will loseground over the coming year.
COMPANIES
The current consensus is that British-based companies thatearn in currencies other than the pound - such as BritishAmerican Tobacco, GlaxoSmithKline Plc - shoulddo well as their revenues will be reported in pounds.
Those reliant on domestic revenues - such as retailers - areexposed should the British economy take a hit. While recent datahas shown the economy shrugged off some the shock of the Brexitvote, the Bank of England downgraded its 2017 growth forecast tojust 0.8 percent from a previous estimate of 2.3 percent. Thegrowth outlook for 2018 was cut to 1.8 percent.
Supermarkets such as no.2 player Sainsbury's have saidsterling's fall since the Brexit will not necessarily lead tohigher grocery prices, as it could be offset by lowercommodities prices and stiff competition.
Travel companies TUI Group and Thomas Cook have seen bookings from UK customers rise this summer, asBritons defied worries that the devaluation of the pound woulddeter people from going on holidays abroad.
INFLATION
Economists estimate that a sustained 10 percent fall in thepound's exchange rate adds about 0.2-0.3 percentage points toinflation over the period of a couple of years.
The Bank of England forecasts inflation will rebound toaround its 2 percent target next year and then overshoot to 2.4percent in 2018 and 2019 - the biggest medium-term overshoot ithas ever forecast.
Some banks predict a bigger, but shorter-lived, spike ininflation next year as the effects of a weaker currency passthrough more quickly to the rest of the economy than the BoEexpects.
Retailers have given a mixed picture on how soon they willpass on price rises. Some, such as fashion retailer Next havesaid they plan to raise prices rather than erode margins.
But other sectors such as groceries see differentcompetitive pressures.
While the fall in sterling should make imported food moreexpensive, Britain's biggest retailer, Tesco, sees nolet up in deflation in the UK grocery market any time soon.
A survey published by the British Retail Consortium reporteda record drop in the cost of food and found little sign of pricerises on the back of sterling's fall since the Brexit vote.
M&A
The shock vote to leave the EU chilled dealmaking activityinvolving British companies to the lowest level in at least twodecades as bosses grapple with what Brexit will cost, ThomsonReuters data shows.
BANK OF ENGLAND
The Bank said in August and again in September that most ofits policymakers expected to cut rates again this year if theeconomy looked on track to slow as it had forecast.
Stronger than expected recent data puts it in a trickyposition. While weakening the immediate case for a further ratecut - especially as soon as next month - it is less clearwhether it will alter the BoE's longer-run expectation of aslump in business investment and a gentler slowdown in consumerspending.
BRITAIN'S PLACE IN THE WORLD
The United Kingdom's gross domestic product, forecast beforethe June 23 vote to be worth about $2.8 trillion in 2016, or theworld's fifth largest, has now slipped behind France.
Its GDP is now worth about $2.32 trillion on currentexchange rates, compared with France's $2.34 trillion. Germanyis the EU's largest economy, worth about $3.5 trillion, and theworld's fourth largest economy after the United States, Chinaand Japan. (Writing by Jamie McGeever, Guy Faulconbridge, David Milliken,Sarah Young; Editing by Robin Pomeroy)
