Winners and losers in the days following Brexit
Canada-plus, Norway-minus, Switzerland-squared or China-cubed. Those might sound like puzzles from a board game you already were hopelessly tired of halfway through Boxing Day. But in fact, they are all short form for the types of trade deal the UK might strike with European Union over the course of the next year. With Phase I now agreed, we can move on to the far more important Phase 2.
The UK will get some kind of deal, that much is certain. But the precise type of bargain will make a big difference to which sectors of the UK economy flourish, and which go into relative decline, in the years ahead. So how should anyone with money in the stock market trade their way through that? There are five pivotal turning points they should look for. Whether the City gets a deal? Will sectors such as drugs or aerospace get special deals? Will we be able to strike trade agreements with the rest of the world, will agriculture be liberalised, and will we be allowed to evolve new regulatory structures? As the answers to those questions become clear, we will know which sectors and regions to back and which to avoid.
There is a whole new lexicon of trade gobbledegook we will all have to get used to over the next year. A Canada-plus deal, as its name might suggest, is a trade agreement similar to the one struck with that country, except presumably with fewer clauses on maple syrup exports. A Norway-minus is effectively the same as EU membership shorn of a few voting rights and financial obligations. As the EU has trade agreements all over the place, there are no doubt lots of others that might get an airing as the deadline for actually leaving approaches. If I were in charge, I’d be arguing for a Moroccan-spiced, simply on the grounds that it sounds more exotic. Along the way, there will no doubt be a few tantrums, lots of dire warnings about falling off a cliff-edge, some memorably condescending put downs from Michel Barnier, and lots of plucky talk about how much the French wine industry could lose out from Nigel Farage, before something is haggled together at the last moment that just about works for both sides. Along the way, the pound will be buffeted as the talks pivot between a deal and no deal, and the Bank of England will remain on standby to unleash yet more printed money in the event that we crash out chaotically.
For anyone invested in the UK markets, however, and for anyone actually trying to run a business, the important task will be to block out all the noise and concentrate on what actually matters – which sectors will benefit, and which will potentially lose out. Let’s take the five big turning points one by one.
First, will financial services be included? The City desperately wants to keep the passporting rights that allow it to sell its products across the Continent. The EU equally desperately wants to poach all those well-paid jobs, and the tax revenues that come with them. Despite that, some kind of compromise may be possible – passporting might remain, for example, so long as there are significant operations based in Frankfurt or Paris. The terms will make a huge difference to what is one of the UK’S largest industries. If the deal roughly maintains the status quo, or something close to it, then London’s position as the financial capital of Europe will be secured for a generation. If they aren’t, it will be under serious threat – and the only sensible response will be to sell the banks, and any company heavily dependent on the London economy.
Next, will sectors such as pharmaceuticals, automobiles and aerospace get a special deal? That won’t be nearly so contentious. The French certainly wouldn’t mind poaching some of those jobs – there will be plenty of champagne corks popping if Glaxosmithkline or British Aerospace moves research facilities to Lyon or Toulouse – but there is far less scope for arguments than over finance. Even so, all those industries need trade to remain as frictionless as possible after we leave. If it looks like that will be allowed, all the pharmaceuticals and aerospace companies are a “buy” (and over on the Tokyo market the car manufacturers as well). If not, they will have to spend a lot of money changing the way they operate.
Thirdly, can we strike trade deals with the rest of the world, and if so how quickly? The EU has been very bad at reaching agreements with other trading partners. For example, talks with the Gulf Co-operation Council, which includes Saudi Arabia, the UAE and Qatar, have been going on since 1990 and stalled way back in 2008. But Saudi Arabia is our seventh largest market for services exports – and we sell more services to them than we do to Italy and Spain combined. If we can start striking deals with those territories it will be great for our booming services exports.
Fourth, watch what happens to agriculture. If we manage to wriggle out of the EU’S punitive tariffs on food it will be a huge boost for the supermarkets and restaurant chains. Why? Because the cost of food will go down. One example. The EU recently increased the tariff on imported oranges from 3.2pc to 16pc, but we are unlikely to replicate that if we have the freedom to get out of it (funnily enough, even in Kent we don’t grow many oranges). It might come as a surprise to diehard Remainers, but lower prices and cheaper raw materials are usually good for business – so two of our largest industries could get a huge boost.
Finally, regulatory divergence will make a big difference. The wider the gulf that opens up between UK law and EU law, while maintaining reasonable access to the single market, the more opportunities there will be for UK companies. For example, our booming technology sector will do a lot better if is freed from the punitive regulations and fines that come out of Brussels. Small companies will thrive if they can escape the EU’S labour laws and meddlesome data rules. The more we are allowed to set our own rules, the better those sectors will do.
The benefits of EU membership for the UK economy were always wildly oversold. A decade after we have left, we will conclude that some industries did a bit better, and some a bit worse, and net-net it didn’t make much difference either way. But it will change the structure of our economy, and to a lesser extent theirs as well (if automobiles are not included for example, you wouldn’t want to be a shareholder in BMW or Volkswagen if they lose out). As Phase II unfolds, the winners and losers will become clear – and investors will need to trade their way through that.