Life After Brexit, Day 7

What a difference a week makes! After closing out 2020 as the MSCI World Index’s worst-performing constituent country, UK shares jumped out of the gate in 2021, leaving the global market in the dust after the first calendar week.^[i] Now, far be it from us to read into a few days’ market movement, but we think it is noteworthy that this rally arrived just as the post-Brexit chaos many commentators we follow warned of failed to materialise. Yes, there were a few speedbumps, but things seem to be going fine overall, and we think forward-looking equity markets appear to be getting on with it.

One big problem Brexit was supposedly going to cause, according to many observers in the financial press, was chaos at UK ports as hauliers got used to new paperwork requirements and—as we suspect all humans would—made some errors. The massive lorry queues that amassed when France closed its border over COVID concerns last month, according to many commentators, foreshadowed Brexit mayhem. So far, though, reports indicate things have gone much better than most expected. In one anecdotal example, Eurotunnel tweeted that all lorries crossing from Britain to France via the Channel tunnel’s shuttle train in Brexit’s first 8 hours—about 200 trucks—had their paperwork in order.^[ii] Now, the Welsh port of Holyhead has reported a reduction in EU-based lorries using the UK as a stopover between Ireland and the Continent, while there is an uptick in lorries taking ferries directly from Rosslare in Ireland to Cherbourg in Northern France—a longer trip.^[iii] But ports operators suggested they are sceptical that this is permanent. For one, rumours of chaos in Britain may have inspired hauliers to make the longer drive. Once it becomes clear things are running overall smoothly, activity could easily return to normal. Two, many reports indicate Brexit dread pulled a lot of demand forward, so this could be a natural hangover. Either way, the massive delays and disruptions so many commentators expected didn’t arrive.

The other big Brexit consequence many commentators warned of basically did come true: A big chunk of euro-denominated share trading left London exchanges as businesses shifted to comply with EU rules. On 2021’s first trading day, according to financial data-provider Refinitiv, roughly €6 billion of share trades shifted out of London—about half the activity normally seen, according to their researchers. That is a hit, but only a small one, as share trading is not exactly a big revenue-generator these days given low commission costs throughout the industry. Here, too, we think markets seem largely unfazed, as UK Financials are performing in line with their global counterparts year to date.^[iv] Numerous reports demonstrate banks have also expected—and prepared for—this for years. In our view, small negative with no surprise power just isn’t likely to prove a major market mover.

The other main hiccups we have seen thus far amount to some confusion amongst retailers and their customers. Trade between the UK and EU is tariff-free under the new trade deal, but it is also subject to customs checks—which carry an administrative fee—and value-added tax. That created some sticker shock for people in the EU who received some online shipments from UK retailers with customs bills attached this week, according to one insightful Guardian report.^[v] Meanwhile, UK retailers are trying to navigate the somewhat more complex tariff regime on reimported goods. As a Financial Times commentary explained it: “To qualify for zero tariff treatment, goods must be able to demonstrate that they ‘originate’ in the EU or the UK, with approximately 50 per cent UK content for most products. But the rules are complicated; destoning dates imported from Israel does not count, while smoking salmon from Norway does. Clothing imports from developing countries such as Cambodia, Myanmar and Bangladesh are tariff-free under the Global System of Preferences. But if they are re-exported without further processing they attract tariffs.”^[vi] So made-in-Britain clothing can cross the Channel tariff-free, but UK clothiers shipping garments made offshore face tariffs. Complicated, but probably also not exactly the biggest deal in the world, and our research shows companies are quite adept at passing new taxes onto consumers. A simple Google search turns up numerous examples.

So no, Brexit isn’t going perfectly. But considering virtually no one we follow expected perfection and most expected a calamity, we don’t think it needs to be. We suspect not disaster was about all it would have taken to qualify as a positive surprise, and overall, this outcome seems several notches above that. Businesses will likely continue adapting and getting on with life, finding new ways to thrive and profit. This medium to longer-term reality is what our research indicates equity market are likely looking at now, not the next week or month. They don’t appear to see huge problems looming, and in our experience, trusting their efficiency and judgment is generally the wisest move for those investing for the long term.