Michael Gove this week advanced one of the stranger arguments for Brexit: he said that the extra bureaucracy now involved in dealing with the EU would help make UK companies “match fit” to trade with the rest of the world.
If that’s true, British households will also benefit from a similar training course in bureaucratic gymnastics. As HMRC has disclosed, people bringing in goods from the EU face an intricate range of hurdles. For example, items worth over £390 will be liable for excise duty or VAT, unless they came by private plane or boat, when the limit is — for some odd reason — reduced to £270. The rate will be 2.5 per cent up to £690, when it will be higher and depend on the type of product.
Mastering this detail clearly requires time and effort, as the Cabinet Office minister suggested. Whether it makes anybody more proficient in handling the red tape on souvenirs brought from China or the US is a moot point.
For services it is worse, because many rules have yet to be decided, including in finance. But here too greater complexity seems inevitable. As has been widely reported, British banks have, for example, been closing accounts for EU-based expatriate customers. To make life harder — and so improve the bureaucratic training effects — the changes vary between banks and countries.
Expect the unexpected. For example, it should be no surprise that HMRC has announced this week that travellers carrying £10,000 or more in cash to or from EU countries must now declare it. This simply applies regulations that are already in force for the rest of the world. But you may be puzzled to discover that people will also have to declare cash carried to Northern Ireland from Great Britain, though not, bizarrely, the other way around. Spare a thought for the old-school money mules.
Over time things might get easier, as new procedures bed down and further sectoral agreements are negotiated. There are a few positive signs. For example, the threat of roaming charges for travellers to the EU has been lifted, with the UK’s four biggest mobile companies promising not to bring them back and London and Brussels pledging to come up with “fair” rates in future.
British investors faced with all this emerging complexity might be tempted to hunker down and focus their attention within the UK to avoid having to think about our links with the EU or anywhere else.
However, when it comes to planning investments, hunkering down now may not be the right reaction. Brexit changes the landscape, including for private investors. The damaging likely impact on the UK has been well documented, including by the government’s independent Office for Budget Responsibility, which forecasts that a negotiated hard Brexit — of the kind we have — would cost 4 per cent of gross national product.
At least we have avoided the worst-case scenario of a no-deal Brexit, which the OBR predicted would cost a further 2 per cent of GDP.
As investors have largely bet on a deal, the sense of relief has been modest, with the FTSE 100 index rising by just 3 per cent since December 21, the day reports of an imminent deal lifted markets. That extended to 18 per cent the gains made since late October, when optimism about a possible deal started rising. The domestically-focused FTSE 250 index of midsized companies has climbed more, by 22 per cent.
On the surface, that suggests investors are betting on a post-deal recovery in business investment, which has been sluggish since the June 2016 referendum hit corporate confidence. But it is not the whole story. Since the autumn lows, the French and German stock markets have done just as well as the British.
Clearly, various powerful forces are at play, headed by the management of the pandemic, the expected vaccine-driven recovery in 2021, the strong belief that global central banks will keep pumping out money and the calming effects of Joe Biden’s election as US president.
UK equities still have a lot of ground to make up. Since the referendum, the FTSE 100 is up by under 8 per cent, compared with gains of over 36 per cent in France, 44 per cent in Germany and a whopping 83 per cent in the US S&P 500. The pound, despite recent modest gains, is still around 8 per cent down against the US dollar on pre-referendum levels.
The bulls certainly have a case. As the UK suffered among the steepest pandemic-linked recessions in 2020, it could see one of the sharpest recoveries, as unused capacity comes back into action. The huge amounts of public money spent to soften the impact of the pandemic will continue to lubricate the economy.
Also, if it is true that consumers are itching to go out again and spend on entertainment, Britain is particularly well-placed to gain, with a large hospitality sector. Finally as in other developed countries, the better-off have hoarded cash in 2020 so are in a position to splurge. Companies too are often sitting on cash, having delayed investments and raised reserve funds during the year. All that bodes well for increases in profits — a crucial driver of stock market performance at this stage in the cycle — and in dividends, a key consideration in the British market.
Susannah Streeter, senior investment and markets analyst at investment platform Hargreaves Lansdown, warns that too rapid a growth surge risks sparking inflation. But she takes a broadly positive view: “If the recovery is sustained, without further pandemic setbacks and helped by a rebound in global growth, it could herald in a new Roaring Twenties era, mirroring the decade-long upswing following the economic pain of [the first world war].”
Kevin Gardiner, global investment strategist at Rothschild, the investment bank and wealth manager, argues in a note that, with so much government and central bank support still active, “investors collectively will mostly continue to ‘look across the valley’ at more sustained economic recovery ahead (globally, but also here in the UK).”
But is there not too much optimism around? Nigel Green, chief executive of deVere Group, the independent financial advisory group, thinks so. He says: “Stock markets will be buoyed by the trade deal and the pound — consistently the most reliable Brexit sentiment bellwether — will be strengthened as a result.
“But let’s be very clear: this is not the end of Brexit . . . A failure to acknowledge that Brexit is far from over could have serious negative consequences to investors who are not paying attention.”
Nor is this just a matter of overall developments. What comes out of Downing Street or Brussels hits specific companies in specific ways.
This week, Ryanair and Wizz Air, the low-cost carriers, both announced plans to take away voting rights from their (numerous) British shareholders to comply with EU rules requiring EU-majority share ownership for airlines.
As the decisions had been expected, the share prices were left unmoved. But another time, another place, with other companies, it might be different. So while investors must look to the horizon, it appears they cannot afford to ignore the Brexit bureaucracy just in front of their feet.