A new report from FinnCap analyst David Buxton says there could be more bad news on pensions from the UK industrial sector after technical plastics specialist Carclo (CAR) was forced to cancel its dividend last month.

The research, which offers a wider perspective on the impact of the Brexit vote on the sector, notes sterling weakness has provided an opportunity for exporters, but that imported raw materials have also increased in price, as seen in the September inflation report with the input price index up 7.6%.

Factory gate prices are also lagging behind - so Buxton warns of a squeeze on factory margins.

Against this backdrop he says investors will need to look closely at which manufacturers have brand strength, intellectual property, or sufficient market in order to determine if they have the ability to pass on price increases to their customers.

Little known rules around distributable reserves meant Carclo had to shelve dividend payments after falling bond yields saw its pension deficit spiral. Buxton sees the potential for further bad news on deficits, with a number of larger industrials having significant pension liabilities that can only have grown since the referendum.

He concludes that, 'the UK may be shifting from a phase of low growth and low inflation, to a phase of low growth and high inflation (it was infamously known as stagflation in the 1970s). At some point, the oil price and various commodity metal prices will start to recover and the UK will see a much more pronounced acceleration of imported input cost inflation.

'One clear difference with the 1970s is that despite fairly high levels of employment, wage growth is low and the structure of the labour market dramatically different.'

Issue Date: 28 Sep 2016