A visit from the Ghost of Christmas Yet-to-Come would have been welcomed as we penned our thoughts on how our supposed exit from the European Union (EU) might affect some potentially vulnerable sectors. By now, you would have thought that would be a relatively straightforward assignment, but two-and-a-half years on from the EU referendum, there is precious little clarity on the terms of our exit – or whether it’s on schedule, or even if it’s going ahead at all.
The governor of the Bank of England, Mark Carney, recently warned that many UK businesses have failed to adequately prepare for likely disruption in the wake of Brexit, but it’s surely a moot point given that negotiators on either side of the divide still can’t point to a likely, let alone definitive, settlement. Whether historians eventually characterise our exit negotiations as an epic piece of statecraft or ineptitude on a grand scale, the UK corporate sphere – and by extension, investors – have been woefully served by government and the civil service in this matter, although HMRC has issued guidelines for ‘no-deal’ trading with the EU.
So, short of any spectral intervention, we can’t be sure that any of the assumptions that underpin our round-up will eventually prove valid. A House of Commons vote on the withdrawal deal brokered between the UK and the EU has been delayed, so all options remain on the table, including an extension under Article 50 of the Lisbon Treaty, or even a referendum re-run; always a popular wheeze with Brussels, as the electorates of Ireland, France and the Netherlands can testify.
Even though uncertainty predominates, it seems reasonable to suggest that the idea of the UK remaining in some sort of a customs union with the EU would probably command a majority in the Commons. The prospect, though wholly unpalatable to those who hanker for a clean break with the EU, would assuage fears over potential disruption to UK supply chains if we were to fall back on World Trade Organisation (WTO) terms.
But if we were to exit the EU without a trade deal, there are some practical considerations for companies that rely on raw materials or finished components coming in from Continental Europe. None of the likely near-term disruptions is insurmountable; businesses can usually adapt to changing market conditions, but they crave clarity above all else.
One of the more unwelcome changes is that importers would have to pay VAT up front on anything they bring into the UK, which would have an immediate impact on cash flows. Companies could also find more capital effectively locked in if they’re forced to build inventories to offset any delays brought about by a step-up in customs activity, blocked ports and other logistics issues, although it should be remembered that most of our existing trade under WTO provisions is conducted through electronic customs declarations, goods pre-clearance and trusted trader schemes.
Nevertheless, VAT provisions are certainly a major consideration if you’re invested in high-volume, low-margin businesses that rely on rapid stock turnover. Meanwhile, a recent survey from the EEF, an industry trade body, suggests that UK manufacturers have increased production of finished goods and are stockpiling ahead of the 29 March deadline.
There has been no commensurate increase in export orders for the UK, with figures from IHS Markit showing that new export business dropped for a second month in a row in November, the first back-to-back contraction since early 2016. This suggests that the increase in manufacturing output represents a precaution against bottlenecks at the country’s main ports, a point borne out by the IHS Markit/CIPS Manufacturing Purchasing Managers’ Index (PMI), which rose to 53.1 in October from 51.1. It’s conceivable that the process will gather further momentum as we approach the deadline.
We’ve already seen some evidence of thisfor companies with a 30 September year-end. Specialist plastics manufacturer Victrex (VCT) has driven up its inventories by around 12 percent, citing a chaotic Brexit as the group’s “principal risk” factor. We expect that the rush to insulate companies against any supply chain disruptions through inventory-build will become increasing apparent in 2018 year-end balance sheets and cash-flow statements, but it’s difficult to gauge whether a widespread expansion of current assets will eventually constrict margins and cash flows. Under normal circumstances the last thing a company needs is excess inventory on its books in the face of an aggregate slowdown in demand in the economy – and there’s reason to suggest we could be faced by that scenario.
Yet while the likely effect on the manufacturing sector of a no-deal Brexit seems to garner no end of comment, it’s curious to note that data analytics firm Dun & Bradstreet’s latest Global Supply Chain Risk Report reveals that the finance sector, which includes the finance, insurance, and real estate subsectors, has experienced the biggest increase in risk exposure over the third quarter (see below). MR
Brexit and UK pharma –a bitter pill to swallow?
If Britain were to leave the EU without a deal, there would be serious implications for the pharmaceuticals and life sciences industries. In fact, some companies seem particularly worried about the likelihood of this outcome, admitting to stockpiling certain inventory ahead of March’s deadline. Fears have been exacerbated by the likes of the British Pharmaceutical Industry (ABPI) and BioIndustry Association (BIA), both of which have warned of a possible interruption to supplies if the deal is not done by the 2019 deadline.
A report published by PwC in February 2018 said there were four key areas of impact for the pharmaceutical and life sciences sectors when it came to negotiating Brexit: regulation, investment, talent and trade. Let’s start with regulation. Analysts there said that losing the single marketing authorisation through the European Medicines Agency (EMA) could slow access of new drugs to the UK market, and if the EMA decided to leave its offices in Britain altogether, the Medicines and Healthcare products Regulatory Agency (MHRA) – an executive agency of the Department of Health and Social Care which is responsible for ensuring that medicines and medical devices work and are safe – could lose its influence and global reputation.
Our future relationship with EMA has been the subject of huge debate. Less than a month ago, The Pharmaceutical Journal said the possible Brexit deal only promised a “possible” tie to the EMA, even though government ministers had admitted that a close relationship with the agency was in everybody’s interest. But this was cast in doubt by professor Paul Workman, chief executive of the Institute of Cancer Research, who blamed the current EMA system for delays to patient care – something that could be significantly improved if power was transferred to the MHRA after Brexit.
Much has been said about the UK pursuing an agreement similar to the EU-Canada deal, which would provide for reciprocal duty-free treatment of goods. But the reality – certainly as far as medicines moving across borders is concerned – is a lot more complex. Mimicking an EU-Canada deal doesn’t necessarily prevent the UK’s loss of access to free trade agreements with the likes of Israel, South Africa and South Korea, which being a member state currently affords.
In a similar vein, how much or how little the UK would be entitled to EU funding when it comes to research and development work is still, almost a year on from PwC’s report, alarmingly unclear. But the consultancy firm says the UK could lose access to both the European Investment Fund (EIF) and the European Investment Bank (EIB), which would curtail all sorts of funding access and venture capital investments.
This would then have a knock-on effect on UK resources, and specifically its ability to attract talented researchers. As long as visa processes and their associated cost remain unclear, the country’s ability to retain industry workers and maintain its reputation for ground-breaking research could be in peril. Indeed, PwC has warned that there even needs to be clarity on the recognition of professional qualifications from other EU countries as part of the new labour laws, if the UK is going to successfully maintain the status quo. HR
Food and hospitality – unexpected opportunities
You could argue that the main reason why Ireland’s Taoiseach, Leo Varadkar, has actively sought to thwart the UK’s departure from the EU is that the health of the republic’s rural economy is largely dependent on its exports across the Irish Sea.
It underlines the fact that virtually every trade consideration has a political element. Food exports came to the fore again recently, when reports started appearing in the press suggesting that UK citizens might be issued with ration cards again. ‘Project Fear’ aside, one man’s problem is another man’s business opportunity.
While the idea of a food shortage post-Brexit may terrify some people, others have taken advantage of the situation. Wincanton (WIN) chief executive Adrian Coleman said the company has received enquiries about warehousing from groups wanting to stockpile goods in case of restricted movement across the English Channel. You could suppose that one of those enquiries might be from Greencore (GNC). The convenience food company’s chief financial officer, Eoin Tonge, said Brexit contingency plans are being put in place, including stocking up on ingredients.
Those with Brexit-induced anxiety may look for solace in a good old British pub, but the options they’ll face when they get there might start to look a bit different. Some of the pub groups have begun to experiment with non-EU wines and beers in case they face either price increases or import restrictions post-Brexit. Predictably, JD Wetherspoon’s (JDW) chairman – and arch Brexiteer – Tim Martin has been among the most vocal about this shift away from European imports. The pub group has started swapping products such as Jägermeister, Courvoisier and German beer for UK or non-EU products “of equal or better quality and price”, although Mr Martin insists that leaving the EU won’t result in higher food prices – contrary to a recent Bank of England prediction that Sterling weakness would lead to a 10 per cent rise in the cost of food.
Patrick Dardis, chief executive of Young & Co’s Brewery (YNGA), said his pub group is exploring similar options, such as putting more wines from Australia and New Zealand on the drinks list. While this may seem like a prudent way to possibly save some money, it will ultimately come down to customer tastes. Mr Martin admitted that if consumers overwhelmingly reject the non-EU replacements, then he may have to give this strategy a rethink.
One sector that might be forced to have a rethink is restaurant companies. An oversupply of casual dining options has made the industry fiercely competitive. The market environment itself is difficult, with collective like-for-like sales across pubs and restaurants flat in October, according to the most recent Coffer Peach business tracker. Although total sales at restaurants specifically increased by 1.2 per cent, this was down 0.3 per cent on a like-for-like basis. Those based in London did better than those outside the capital, but once you factor in higher business rates and the national living wage, those gains are largely wiped out. This situation does not look likely to improve if Brexit makes it more difficult for people to move to Britain as there will be fewer people to fill those empty tables – even if a weaker pound gives tourism a boost (assuming they can get here). Changes to import taxes could make some ingredients more expensive, and fewer EU workers could impact staffing. In this situation, restaurant closures look inevitable.
Another group of companies that have given their strategies a rethink are the drinks makers. They’ve faced two major issues with using sugar as an ingredient – the UK’s sugar tax on sweet beverages that was implemented in April, and the end of EU quotas on sugar production. Companies such as Britvic (BVIC) and AG Barr (BAG) have been busy reformulating their products to have less sugar or none at all. For others, such as stevia company PureCircle (PURE) and flavourings maker Treatt (TET), this has been an opportunity to sign deals with major consumer goods companies to help them replace sugar with their alternatives. The price of the sweet stuff sold in the UK now follows the global market price, so this trend should stick even after the UK is no longer subject to European regulation. This is bad news for sugar producers such as Associated British Foods (ABF), whose sugar business saw profits halve during the year to September after sugar prices had come down “more and faster” than expected. JF
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