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 stocks jumped out of the gate in 2021, leaving the global market in the dust after the first calendar week. 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 widely expected post-Brexit chaos failed to materialize. Yes, there were a few speedbumps, but things seem to be going fine overall, and forward-looking stocks appear to be getting on with it.

One big problem Brexit was supposedly going to cause was chaos at UK ports as truck drivers got used to new paperwork requirements and—as all humans would—made some errors here and there. The massive truck backlogs that amassed when France closed the border over COVID concerns last month, allegedly, foreshadowed Brexit mayhem. So far, though, things have gone much better than most expected. In one anecdotal example, Eurotunnel tweeted that all trucks 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. Now, the Welsh port of Holyhead has reported a reduction in EU-based trucks using the UK as a stopover between Ireland and the Continent, while there is an uptick in trucks taking ferries directly from Rosslare in Ireland to Cherbourg in Northern France—a longer trip. But ports operators are skeptical that this is permanent. For one, rumors of chaos in Britain may have inspired truckers to make the longer drive. Once it becomes clear things are running overall smoothly, activity could easily return to normal. Two, Brexit dread pulled a lot of demand forward, so this could be a natural hangover. Either way, the massive delays and disruptions so many expected didn’t arrive.

The other big, widely expected Brexit consequence basically did come true: A big chunk of euro-denominated stock trading left London stock exchanges as businesses shifted gears to comply with EU rules. On 2021’s first trading day, according to Refinitiv, roughly €6 billion of stock trades shifted out of London—about half the activity normally seen. That is a hit, but only a small one, as stock trading is not exactly a big revenue-generator these days. Here, too, markets seem largely unfazed, as UK Financials are performing in line with their global counterparts year to date. Banks have also expected—and prepared for—this for years. A small negative with no surprise power just isn’t likely to prove a major market mover.

The other main hiccups thus far amount to some confusion among 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. Meanwhile, UK retailers are trying to navigate the somewhat more complex tariff regime on reimported goods. As Financial Times 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.”^[i] So made-in-Britain clothing can cross the Channel tariff-free, but UK clothiers shipping dresses made offshore face tariffs. Complicated, but also not exactly the biggest deal in the world, and companies are quite adept at passing new taxes onto consumers.

So no, Brexit isn’t going perfectly. But considering no one expected perfection and most expected a calamity, it doesn’t need to be. 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 continue adapting and getting on with life, finding new ways to thrive and profit. This medium to longer-term reality is what stocks 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.