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Profit warnings surge to 11-year high! This is what I think you should do next

The investing landscape may be getting more difficult as the global economy cools and key geopolitical events prompt waves of cross-market volatility.

We here at the Fool believe the environment remains ripe for stock pickers to still make decent returns on their investment. Though I must admit recent data from EY Club on UK company warnings illustrates why investors need to be more and more careful where they decide to park their hard-earned cash.

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Warnings at financial crisis levels

According to the accountancy group there were some 235 profit warnings issued by London-quoted companies during the nine months to September, soaring from 199 in the same period of 2018. Tellingly, this was also the highest number of warnings since the time of the financial crisis back in 2008.

What EY’s data also shows is that the number of such warnings has picked up in recent months. These clocked in at 77 in the third quarter, versus 69 in the previous three-month period. Increased stress created by Brexit is becoming an additional factor and was responsible for 22% of all profit warnings in the third quarter, up from 10% in the three months to March.

Meanwhile, just over a third of profit warnings in quarter three directly cited the impact of macroeconomic volatility, EY Club says, with a further 30% are attributed to contract delays or cancellations.

Astonishingly, 18% of all British companies have issued a profit warning in the past 12 months. And Alan Hudson, head of restructuring for UK & Ireland at the accountancy, commented that “in addition to domestic concerns [over the summer], UK businesses have felt the growing impact of escalating political and trade tensions in the global economy.”

He added that “warnings [are] becoming more widespread across all FTSE sectors,” and that “although the economy is in better shape now than it was in 2008, there are clear parallels in terms of sheer unpredictability.”

Careful now!

EY’s latest report shows stock pickers need to be increasingly careful and particularly so when it comes to investing in companies with hefty exposure to the UK economy. And more specifically, investors need to be aware of the increasing turbulence Brexit is having on homegrown companies — as I explained recently, whether or not Prime Minister Boris Johnson gets his freshly-minted EU withdrawal deal through the Commons, the uncertainty created by Brexit looks set to plague the UK economy for many years to come.

What EY’s data showed, though, is there’s particular stress in the retail sector as consumers become increasingly unwilling to loosen the pursestrings. Indeed, there were 28 profit warnings issued from the retail sector between January and September, 22% more than the total for the whole of 2018, representing an eight-year high.

However, in recent months the number of warnings have edged up from other sectors. There were nine warnings from software and computer services firms in the third quarter, matching the number from Britain’s retailers, and seven from the media sector.

Times may be getting tougher, sure, but that’s not to say investors should run for the hills. I would argue there are plenty of shares that are just too cheap to miss right now.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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