Investors who have listened to the news over the last few months might be led to believe that the turmoil in British politics means imminent disaster for the UK economy. Business news can provide an alternative take on reality and listed companies are preparing for exiting the European Union no matter what deal is agreed.
As a starting point, businesses have received guidance from the government on what preparation will be required to trade if the European Union and the United Kingdom cannot reach a deal. The UK operates on World Trade Organisation tariffs with other trade partners, but it is encouraging that many businesses have started their contingency planning to maintain stability through operating within the European structure. Following Theresa May’s CBI speech it is clear frictionless trade with no tariffs is a goal for both government and business.
With clear reporting requirements, publicly listed businesses have given insight into how they might be positioned ahead of any conclusion to UK/EU negotiations. Some sectors have significant risk from a potential no deal outcome. For example, issues over cross border trade and labour movement with Europe have the potential to impact short term investment returns. We have selected some relevant examples and companies have kindly provided a range of potential solutions within their latest trading statements.
Planes and trains crossing borders could see delays at borders and problems with scheduling. EasyJet announced that as part of its latest trading statement that it had registered its fleet in Austria, due to many flights being inter-European destinations. With airline operator certificates granted by the National Aviation Authority it will allow planes to fly and be recognised within European jurisdictions. The exercise cost the firm legal and overhead costs of £7.5m.
Delivering financial services in foreign jurisdictions and dealing with a separate legal and regulatory system could be equally challenging. The insurance industry has been proactive in recognising and understanding the requirements. Insurer Hiscox gained approval to operate in Europe through a subsidiary company based in Luxembourg. The process involved transferring existing and historic policies and liabilities to the new entity, which mitigates the current uncertainty around the UK’s exit strategy for clients domiciled in Europe. It also serves as getting regulatory approval ahead of any finalised deal without interruption to operations. Changing the company structure has cost Hiscox approximately $15m and the European subsidiary will receive €40m of capital to service its capital requirements.
Possibly one of the biggest challenges to the UK economy is maintaining its supply chain. Limiting disruption to the supply of goods and maintaining product standards remains unresolved. UK manufacturer, Victrex exports over 95% of its goods abroad. It is limiting initial uncertainty by holding greater inventory and part finished goods. This represents a drag on cash flow within the business with inventories rising by 16% in the coming year to £90m on group revenue of c.£326m. A key risk for the business is operating an efficient supply chain, which will be mitigated to some extent by acquiring additional warehousing space in Europe and China.
It is clear, uncertainty is not good for business, however planning by businesses is not a futile exercise given the examples we have remarked upon. In fact, in some cases a smooth transition might provide an advantage over the competition and demonstrate the credentials of management teams to react to problems. However, without tariff free trade, costs are likely to rise for both companies and the consumer. With the deadline to article 50 on the 29 March 2019 doing nothing could attach a greater cost.