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A PUBLICATION NEW PUBLICATION FROMFROM REDMAYNE REDMAYNE BENTLEY BENTLEY

SUMMER2021 WINTER 2020

TARIFFS AND THE MARKETS

THE COST OF SOVEREIGNTY How are our industries affected?

BREXIT AND THE CONSUMER: WHAT’S CHANGED? Tourist information

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CONTENTS

INTRODUCTION 2 Let Us Now Look Forward

INSIGHT 4 Tariffs and Markets

BREXIT AND THE 6 CONSUMER: WHAT’S CHANGED? FREE FROM EUROPE & HEADING FOR THE MOON

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THE COST OF SOVEREIGNTY 12

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LET US NOW LOOK FORWARD JAMES ROWBURY | INVESTMENT RESEARCH LEAD Nearly three years of the Brexit impasse ended over the festive period and, as investors, we are now able to look beyond the noise and rhetoric of both sides and see a clearer roadmap of business profitability. Whatever side of the fence you sit on, it remains a positive outcome that an eleventh-hour deal was struck. At the time of our last publication, a deal was looking increasingly unlikely, but with such a fraught battle over maritime law, frankly, the world has bigger fish to fry during a global pandemic. The imminency of our need to cooperate, at this time of crisis, shone through and both our own government and the EU can now focus efforts on the elephant in the room: the COVID-19 vaccine roll-out.

Nevertheless, it is important to review this historic trade deal and its impact on investment markets. As we trawl through the detail, one thing has become abundantly clear: there is a lack of it. The biggest cost to our domestic industries is perhaps the lack of clarity on fundamental issues and, let us not kid ourselves, there are more negotiations to come in order to tie up loose ends.

We just hope these will remain behind a more closed door to the media, avoiding the fickle sentiment of markets, but remaining carefully scrutinised by our elected leaders.

Sovereignty. The Brexiteer red line.

An issue that Boris Johnson was keen to embed throughout the deal, handing power to govern back to the Government, and ultimately the British people. It was important to keep promises. But, we ask, what price is there to pay? How deep does this run through our economy? Trade, Financial Services, Energy and many more will all be counting the cost as we enter a new era (See: The Cost of Sovereignty).

After a torrid few years, we are now seeing some positivity in UK markets; not least, the vaccine roll-out has provided hope to those businesses unable to operate under economic lockdowns, but the avoidance of a NoDeal Brexit gave way to a relief rally in the Pound, and subsequently, businesses in need of clarity. Beyond the initial reverence, we retain our long-term outlook and ask what this impact might be (See: Tariffs and the Markets).

Unfortunately, it seems the divergence of views will stick for some time. The culture war that has emerged from Brexit means that each side has a hard-line faction seeking fault in their opposition’s stance. Brexit is done now and, whether some like it or not, we need to keep eyes firmly forward to grab opportunities (See: Free from Europe & Heading for the Moon). 2021 will no doubt be another interesting year, but hope is in sight and the markets are not short of new ideas.

“After a torrid few years, we are now seeing some positivity in UK markets; not least, the COVID-19 vaccine roll-out has provided hope to those businesses unable to operate under economic lockdowns” 3

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INSIGHT TARIFFS AND THE MARKETS BEN STANIFORTH | RESEARCH ANALYST

In an event that was somewhat overshadowed by the Coronavirus pandemic and the festive period, the Brexit deal marks a momentous occasion for UK and its future relationship with its largest trading partner, the EU. The gravity of such a deal cannot be overstated. Thought to be worth ÂŁ668bn each year and covering almost every corner of the economy from fishing to healthcare, the deal helps to provide at least some clarity going forward for British and European companies who rely on each other to do business. The deal will mean lower import/export costs and a reduction in red tape than under a no deal or hard Brexit scenario, allowing firms to continue trading freely across borders and helping to secure jobs.

THE UK ECONOMY BY SECTOR

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Heralded by Boris Johnson as a significant win for the UK, with Brexit finally done and the economic cost minimised, he is likely to remain popular amongst Conservative peers. However, while the deal covers most areas of contention for the two economies, agreements on financial services remain limited and may weaken London’s globally recognised position as the financial hub of Europe.

Taking a more general market perspective, the deal is likely to benefit those companies most who retain significant operations in either the UK or the EU, and/or those who rely on either side for trade. Somewhat surprisingly, this excludes many in the FTSE 100 and is more likely to impact the more domesticallyfocused FTSE 250. The 100 largest UK listed companies derive 76% of their revenues from locations outside of the UK, with the US a popular export destination for global firms. Ashtead, a UK listed industrial equipment rental company, accounts North America (US and Canada) for 89% of its revenues and the UK for just 11%, exposing the company to exchange rate fluctuations between the Dollar and Pound rather than the completion/quality of a Brexit deal. More domestic-focused companies which reside in the FTSE 250, such as airliner easyJet, derive the majority of their revenues from both the UK and EU, while also maintaining strategic bases across Europe, are more likely to be impacted by the aerospace cooperation and will certainly be more relieved that an agreement has been finalised.

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2016 2016 SERVICES

CONSTRUCTION

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ONGOING NEGOTIATIONS Since the industrial revolution, and more recently the mid 1900s, the UK has been slowly transitioning towards a services-based economy. Sectors such as legal, financial and consultancy have seen impressive growth at the expense of more traditional sectors such as manufacturing and agriculture. Given the current makeup of the UK economy and its reliance on services such as finance, it further underscores the need for clarity over the sector’s future relationship with the EU. This means that further negotiations will be required if the UK wants to protect its services sector. However, pressure from businesses and industry groups will likely ramp up in the coming months after years of negotiations, only to be left out of the main deal almost entirely, may leave many short on patience.

However, given that the UK will continue to abide by GDPR regulations while also adopting other EU regulations, we can say that both parties do possess similar aspirations when it comes to outcomes. While small differences remain, it is clear that agreements on financial services and other areas of contention are in everyone’s interest with the main Brexit deal setting an encouraging precedent.

LONG-TERM IMPACTS The policing of such a deal, however, may potentially create one of the most significant long-term impacts on markets going forward, particularly in the UK. If either side suspects the other is diverging from any part of the deal and gaining an unfair advantage, they each have the right to challenge the other through a dispute mechanism which could, in the worstcase scenario, end with tariffs being imposed on either side.

However, given that this is not an ideal outcome for either side, any legal challenge will likely be met with significant opposition and potentially a war of words.

With financial markets disliking uncertainty in any form, investors will not look upon tariffs or such rhetoric favourably.

With the UK particularly adamant that it would like to govern itself as it sees fit and the EU insistent that it sticks to (or at least close to) its rules, this could create a recipe for disaster that ends in tariffs.

We have seen under the Trump administration the effect that tariffs can have on global markets and consumers, creating problems for businesses across multiple regions and often helping to raise the price of goods and services. During the 22.2 US-China trade war, the S&P 500 dropped almost 20% on concerns over the escalating tensions between the two countries and its impact on businesses. While a UK-EU trade dispute is unlikely to rise to this level, it serves as a warning as to the thoughts and fears of investors and the further disruption that companies may have to endure.

S&P 500 Shows the impact of Trumps tariffs with China on the market (Source: FactSet) 3000

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BREXIT AND THE CONSUMER: WHAT’S CHANGED? Almost five years on from the United Kingdom’s historic EU referendum, the country has now completed its departure from the union and the second largest trading bloc in the world.

“The consumer right of Brits buying from EU retailers will remain unchanged, but online shoppers and holidaymakers buying products in the EU that cost more than £390 will have to pay import duties.”

In the months and years leading up to the UK’s withdrawal, there has inevitably been serious debate on a number of topics which affect businesses and the general public on both sides of the English Channel, not least, trade.

Although we are all affected by the UK’s new trading terms with nations across the world, the long-term effects on our daily lives remain to be seen. In the short-term, however, some effects of Brexit have already been felt, both in Great Britain and Northern Ireland.

RETAIL In terms of the UK High Street, changes have been somewhat minimal thus far, largely due to tariff-free trading between the EU and the UK continuing as part of the new deal. The idea is that maintaining tariff-free trading between the two will allow for shelves to remain stocked and price rises to be kept at a minimum.

Without an agreement, the UK would have defaulted to World Trade Organisation (WTO) trade terms, meaning that products such as meat and dairy could have incurred tariffs of up to 50%.

The European Commission stated upon completion of the deal that the UK and EU created “an ambitious free trade area with no tariffs or quotas on products, regulatory and customs cooperation mechanisms.”

While most High Street retailers have been able to continue largely as normal, some food retailers have reported difficulties.

Gaps have been reported on the shelves of some supermarkets, particularly in Northern Ireland due to it sharing a land border with the Republic of Ireland and, therefore, the EU. Similarly, Marks and Spencer, Sainsburys and Tesco have written to the UK Government suggesting that when the Brexit grace period ends of 31st March 2021, which has thus far exempted companies from red tape, stock shortages will get worse. Meanwhile Ocado was the first online grocery retailer to report potential shortages in the future as a result of red tape.

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This, coupled with the panic buying and general shortages brought on by the Coronavirus pandemic, means that consumers have often been left without many of their usual groceries. However, the UK government advised in January that more disruption to supermarket supply chains should be expected as routes into and out of the UK get busier following the quieter new year period, a period heavily affected by border delays in Dover.

The consumer right of Brits buying from EU retailers will remain unchanged, but online shoppers and holidaymakers buying products in the EU that cost more than £390 will have to pay import duties. Retail, though, isn’t the only sector affected by Brexit.

TRAVEL How Brits and our European neighbours travel between Europe and the UK will be one of the changes that effects the average person the most. Freedom of movement between the two zones is now a thing of the past, with the new rules meaning that UK citizens can only visit the EU for business or holidays for a maximum of 90 days in any 180-day period.

Although travel will be visa-free, from 2022, UK visitors to countries in the Schengen Area will be required to pay a £6.28 visa waiver fee. Travel to Ireland, however, remains unchanged.

Departures Check-in Departures Hire Car

One of the most well-documented changes (quite literally) will see our passports revert back to their original blue colour, while the European Health Insurance Card (EHIC) is being replaced by the new UK Global Health Insurance Card (GHIC) to allow UK nationals access to emergency healthcare overseas. In addition, Brits will be subject to more stringent border checks when entering EU nations, losing the right to use ‘EU Citizen’ lanes in airports and instead having to use ‘Rest of the World’ queues.

Meanwhile, regulations concerning items the average citizen can transport between the UK and the EU has also changed, as one haulier discovered when his ham sandwiches were confiscated at the Dutch border in January. Other factors which consumers may not have considered previously will also change. For example, UK visitors to Europe may incur roaming changes when they use their mobile phones abroad, with network providers capping these at £45.

Brexit has inevitably brought about a multitude of changes to existing processes, services and aspects of our lives which we may previously have taken for granted. Whether the Brexit deal turns out to be good or bad for the British consumer remains to be seen in the months and years ahead.

Tourist Information UK citizens will continue to enjoy visa-free travel to the EU, plus Switzerland, Norway, Iceland and Liechtenstein

Check-in First Aid Hire Car Arrivals Departures

Brits are restricted to a maximum of 90 days in the EU in any 180-day period

First Duty Aid Free Check-in Arrivals Hire Car Duty Free First Aid Departures Departures

Visitors can still drive their cars in the EU, but you will need the relevant documents

Arrivals Check-in Check-in

UK citizens will eventually get new blue passports, but the existing ones less than ten years old with six months remaining are still valid

First First Aid Aid

The European Health Insurance Card (EHIC) is being replaced by the Global Health Insurance Card (GHIC) to give Brits access to emergency care abroad

Duty Free Hire Hire Car Car Arrivals Arrivals Duty Duty Free Free

Tourists will still be able to take advantage of duty-free shopping in Europe, but some limits will increase

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FREE FROM EUROPE & HEADING FOR THE MOON SAUL FULDA | INVESTMENT EXECUTIVE We had been warned that post-Brexit corporate Britain would be stricken to the back of the queue and left to struggle on the global stage. But if the first few weeks of 2021 are anything to go by, investors ought to be looking towards the future with surquedry.

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In the same week when the City of London agreed to bring back Swiss stock trading, worth an estimated €1.2bn in daily trades, London cemented its status as Europe’s leading technology hub, having raised more than US$10bn in funding last year, a larger slug of venture capital funding than any other European city. This, alongside the news that the UK economy beat forecasts for November, paints a positive picture for the future of post-Brexit Britain.

But I would like to focus this article on another piece of news I received this week; namely, that Moonpig, the online greeting card retailer, has announced plans for a £1bn-plus market listing later this month. Moonpig was founded 20 years ago

by Nick Jenkins, previously a sugar trader at Glencore, who named the business after his school nickname to make the company stand out in a Google search; Mr Jenkins sold out for £100m in 2011.

life, while Britons buy more greetings cards than any other nationality per head.

Moonpig has focused its operations in the UK and the Netherlands and has smaller outlets in the US and Australia, and the group is well-placed in its domestic market, boasting a 60% share of Britain’s online card market. With only 10% of the overall card market based online, the growth prospects are visible for all to see. Greater international expansion and integration could also be on the cards.

Make no mistake, Moonpig is more than merely a card retailer.

As with all leading technology companies, data is king.

Moonpig will fuse the data it collects with specially designed algorithms to know exactly why, when and what consumers demand. Additionally, 44% of revenues in the six months to October came from gifts, with the company targeting the sweet spot of £15 to £25 items, while the group is also considered one of the five largest florists in the UK; this variety of revenue streams will help to smooth any bumps in the road.

Moonpig has been owned by Exponent Private Equity since 2016 and, importantly, the Private Equity house is believed to want to retain a substantial stake after the listing; clearly, it believes this beast has further to run.

“Moonpig’s greatest strength Not only does this provide an injection of confidence to the could be in the form of wider business environment, the company chair, Kate Swann. announcement is also a step Ms Swann has previously in the right direction for our domestic equity market, which transformed and revitalised is currently dominated by the both WH Smith and SSP, old economy and light on tech revamping the former from stocks.

But despite all this, Moonpig’s greatest strength could be in the form of company chair, Kate Swann. Ms Swann has previously transformed and revitalised both WH Smith and SSP, revamping the former from an underwhelming retail outlet, to a travel-focused hub of convenience.

With earnings before interest, an underwhelming retail taxes, depreciation, and Moonpig has been one of the outlet, to a travel-focused hub amortization (EBITDA) margins of winners of the past ten months. of convenience.”

26% and predicted full year earnings With consumers unable and/or of close to £80m, double last year’s unwilling to venture into a bricks-andresult, the proposed £1bn valuation would mortar store to purchase birthday cards price Moonpig at close to 12x earnings. This and other niceties, demand has shifted online. seems reasonable. The closure of physical competitors, That Paperchase filed notice to appoint administrators alongside the digitisation of the greeting card and florist earlier this month, which sits together with the demise of Card markets, should act as a springboard for Moonpig’s future Factory, whose shares have fallen by c.60% over the past year, growth, while the company enjoys an expanding and reliable while Moonpig saw sales grow by 135% to c.£156m in the six customer base and a diversified source of revenue streams. The months to October, perfectly illustrates the changing market possibility of international expansion adds some extra jazz. demographics. While the COVID-19 induced lockdowns have undeniably provided a tailwind for the company, growth can I believe we should look towards post-Brexit Britain with be traced further back; Moonpig’s sales grew at a compound optimism and excitement. Moonpig, alongside companies such rate of roughly 13% over the five years before the pandemic. as the footwear producer Dr Martens, the online food delivery platform Deliveroo, and Darktrace, the cybersecurity group, With 80% of revenues coming from returning customers, the are all eyeing stock market flotations in 2021. London clearly company has clearly cemented a sticky and reliable client base remains an attractive venue for business investment and at the which should filter into subscription-like revenue streams; centre of the European financial market. Salut to 2021. after all, birthdays are amongst the most certain features of

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THE COST OF SOVEREIGNTY JAMES ROWBURY | INVESTMENT RESEARCH LEAD

With sovereignty top of the agenda for the more hard-line Brexit advocates, most will be pleased with the outcome of Prime Minister Boris Johnson’s deal achieved over the festive period.

Yet with talk of border backlogs and reduced fishing rights we ask, what is the cost to our industries?

TRADE OF GOODS On a positive note, most goods sold to the EU from the UK will not be hit by any tariffs or quotas. However, these direct costs are not the cause for concern coming out the other side of this deal and, in fact, the indirect costs of increasing regulatory burdens are likely to hit UK firms selling into Europe.

Restrictions in their most simple form are likely to put a dent in UK export margins across a number of sectors. In manufacturing, many countries import UK-produced vehicles, with 81% of all vehicles produced in the UK exported overseas. Of this figure, the EU is the biggest importer of UK-manufactured cars, with c.56% of exported cars landing on the continent. The limits on tariff-free access to the EU market hinges on the local content of the vehicle being exported so, as a minimum, 55% of the vehicle must be made from parts from either the EU or the UK to avoid this additional cost.

This poses issues for British auto manufacturers who are now having to source at least this proportion of parts from regions with higher labour and manufacturing costs. However, electric

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vehicles (EV) are given some leeway, with EVs and Hybrids allowing up 60% international parts (falling to 55% by 2026) and the most important and difficult component to source, batteries, allowed to be 70% international (falling to 50% in the same period).

FINANCIAL SERVICES Unfortunately for perhaps the UK’s greatest export asset, The City of London, the effects of the Brexit deal remain unclear, with a very vague overview on general provisions for financial services. There remains no direction on market access, with yet more extensions from the EU commission as it analyses the UK’s financial regulatory structure. We await this verdict tentatively. That said, the UK and EU both desire strong financial oversight, where cooperation would be essential and, as such, are set to have a Memorandum of Understanding by March.

ENERGY Although the UK has left the EU and, therefore, its emissions trading system, there is agreement to cooperate in terms of carbon pricing with potential to link the two systems. The deal also ensures the security of energy supply and, since the UK is a net importer of electricity, importing 8% of power from the EU, there are agreements to maintain the interconnectors allowing efficient electricity flows between the regions.

PROFESSIONAL SERVICES People working in professional services in the UK will now face some barriers to practicing their careers in the EU and will need to have their qualifications recognised by each member state in which they want to work. When it comes to business travel for professionals, managers and specialists will be allowed to stay in the EU for up to three years, and trainees up to one year. without a work permit or economic needs tests.

By no means are the trade of goods and financial services the only affected markets, but it could certainly be argued that the deals made for the industry will have the longest-term economic impact on the United Kingdom. Firstly, there are limitations on how the UK government can support failing firms and banks and, in order to match EU law, the UK cannot save a failing company without a restructuring plan and can only aid a failing bank with the minimum capital needed to wind down the bank’s operations. In addition, the UK must disclose any subsidies they award to companies.

When it comes to settling these disputes between the UK and EU, there may be an arbitration panel to rule on disagreements when one side has not held up its part in the agreement and which can order that side to either resolve the issue or compensate the other side. If one party does not follow the direction of the arbitration panel, the other party can avoid obligations which may include blocking market access or reducing cooperation. It’s certainly clouded with uncertainty.

FISHING RIGHTS Are there plenty of fish in the sea? When it comes to British waters, it became a symbol of sovereignty. It did not present a large economic impact on the country but remained one of the most contentious sticking points in the eleventh hour of negotiations. In short, the UK fishing sector will take 25% of the current catch of EU fleets in British waters, which will take up to five years to be phased in. However, although the UK will eventually have control of its own waters, the EU could impose tariffs on fish if the UK limits access to British waters from the EU. Fears surrounded regulatory red tape when it came to customs; however, both parties have agreed on a trusted trader programme to avoid those indirect costs in relation to a slowing supply chain.

“Are there plenty of fish in the sea? When it comes to British waters, it became a symbol of sovereignty. It did not present a large economic impact on the country but remained one of the most contentious sticking points in the eleventh hour of negotiations. ”

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THE COST OF S TRADE OF GOODS

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• Most goods sold from UK to EU will not be charged with tariffs or quotas • Direct costs are not the main concern, but indirect costs of increasing regulatory burdens are likely to hit UK firms selling into Europe • UK produced vehicles - 81% of all vehicles are exported internationally • UK manufactured cars - c.56% of exported cars exported to EU • The limits on tariff-free access to the EU market hinges on the local content of the vehicle being exported. At the minimum, 55% of the vehicle must be made from parts from either the EU or the UK to escape tariffs • Electrical vehicles are given a slight bit more leeway, with EVs and Hybrids allowing up 60% international parts (falling to 55% by 2026) and batteries can be 70% international (falling to 50% in same period)

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• The deal provides a very vague overview on general provisions for financial services, but with no direction on market access. The issues come from the European Commission claiming it needs to analyse the UK’s financial regulatory structure to check that it is on par with that of the EU, and until then a verdict will not be made • The UK and EU, however, do both desire strong financial oversight, where cooperation would be essential and therefore are set to have a Memorandum of Understanding by March • The deal so far includes no commitments to allowing financial services firms access to EU markets

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• Both the EU and UK will uphold their Environmental, Social, Labour and Tax transparency standard to ensure not to outcompete each other • If either side diverges from these standards, the other side can impose tariffs – limited to the amount that would solve the divergence • An independent panel would arbitrate these retaliations (not the European Court of Justice) • Government cannot bail out a company on an unlimited scale and cannot rescue the firm without a restructuring plan • Failing banks must only be given the minimum level aid to wind down the organisation • The UK fishing sector will take 25% of the current catch of EU fleets in British waters, which will take up to five years to be phased in • The UK will eventually have control of its own waters, the EU could impose tariffs on fish if the UK limits access to British waters from the EU

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• There will be regulatory red tape regardless of the zero tariffs and quotas • To limit this disruption at customers there will be a trusted-trader programme • There will also be unique measures to assist firms operating through Dover and Holyhead. As well as facilitation arrangements for wine, vehicles, pharma and chemical products

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AVIATION AND TRUCKING

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• The EU has not granted the UK automatic recognition of their aerospace designs and products and is waiting to “gain confidence” in the UK’s ability to oversee design certification • Both parties aim to maintain efficient management of visas and border arrangements for trucking activities

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• Data will continue to flow until the EU makes a data adequacy decision (expected early 2021) • The EU will freely ship data to the UK and not classify this transfer as shipping to a third party • If the UK wishes to transfer data to another country during this decision period, it must make the EU fully aware of the information relating to that data • Data security remains a top priority for the EU and UK, and therefore standards on data protection will be maintained, without imposing limits to facilitate trade in the digital economy • The UK will not have access to the EU’s internal energy market.

• New arrangements will be in place by April 2022 • The international cables running from the EU to the UK will be maintained as the UK imports 8% of its power from the EU • The UK has agreed to cooperate on carbon pricing for the EU’s emissions trading system, even though it will no longer formally be part of that system • EU or the UK would be suspended if either breach the 2015 Paris Agreement on Climate • Disputes between the EU and UK should be settled between those two parties, with no intervention from EU courts • A panel can be used to arbitrate a dispute, and can order one party to resolve or pay compensation to other party – if this order is ignored, the disadvantaged party has the right to suspend obligations such as blocking market access or limiting their cooperation

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• No automatic recognition of professional qualifications • Professionals must have their qualifications recognised in each member state which they wish to work

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• Managers and specialists can stay in the EU for up to three years, whereas trainees can stay up to one year • People setting up a business in the EU from the UK can remain there for up to 90 days, every 6 months

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• Both the EU and UK agreed to uphold standards of tax transparency and combating against tax avoidance

• No tariffs – great for agriculture and fishing as the WTO estimated that some dairy products would have been taxed at 40% • There will be extra checks such as sanitary and Phyto-sanitary controls at the member state boarders • Cooperation for investigations into terrorism, such as exchanging DNA and airline passenger information, will remain • UK loses membership of Europol and Eurojust • Similar extradition practices to those the UK has with Norway and Iceland

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