And just how efficient have markets been in the face of Brexit? A recent study by the University of Cambridge contrasted the Betfair betting market and the sterling-dollar exchange rate when the polls closed on the evening of the EU referendum in June 2016. It found that both markets were slow to react as voting patterns crystallised, but it was clear that Betfair punters had anticipated the leave vote an hour before City currency traders, effectively setting up an arbitrage opportunity in the process. The study suggests that while both sets of market participants were prone to behavioural bias – an unconscious refusal to countenance a leave vote – the forex traders held to their collective delusion for longer.
Lest we forget, trading volumes hit new records as around $2 trillion was wiped off global stock markets in the immediate aftermath of the vote. Sterling collapsed to a three-decade low and the FTSE 100 initially contracted by 8.3 per cent as capital shifted rapidly into bond markets. Yields on 10-year gilts, which move inversely to price, were driven down 1.1 per cent, signalling that traders were pricing in an interest rate cut from what was an historic low anyway.
You might argue that UK equities have underperformed in the intervening period, at least if you factor in the relative decline of sterling when you’re weighing up total returns, but the severity of the initial market reaction does seem a bit overwrought in hindsight. But the longer politicians have dithered, the more risk appetite has waned, evidenced by managed money moving out of UK risk assets and a slowdown in IPO activity. Some would also highlight the FTSE 100’s forward yield of 4.9 per cent as proof positive that UK equities are being held in check by Brexit. Yet there do seem to be anomalies out there.
Take Kerry Group (KYGA). If you had to nominate one business segment that had the most to lose from a no-deal Brexit it would probably be Ireland's food producers. With 2018 revenues of €6.6bn (£5.8bn) Kerry Group is not only the leading player in the sector, but also Ireland’s largest exporter, with 25-30 per cent of its top line generated from sales in the UK, particularly through its consumer foods division.
In its last financial year, the group allocated €17.3m towards a Brexit currency mitigation programme, while stockpiling several weeks' supply of raw materials in case the UK exits the EU without a replacement trade deal. The Tralee-based multinational has well-established manufacturing operations in the UK and in mainland Europe, which also serve to mitigate risk.
But the main threat to the business, beyond a possible switch to the tariff regime under the World Trade Organisation, is from a supply chain perspective. With three quarters of Irish exports shipped through the UK, Kerry Group might have to drastically alter its logistics operations if no agreement is reached between Brussels and London. It would be difficult to quantify the level of additional costs given the scale of any future disruption is unknown, nor the extent to which these could be passed on to customers.