Hedging Against Brexit

As we edge towards an abrupt Brexit as agreement with the EU has turned into a game of chicken, it’s worth considering some options. Or as my M.P. Bob Neill said about divorce on Twitter “the current system of divorce creates unnecessary antagonism in an already difficult situation” (he was talking about personal divorce in the UK as head of the Justice Committee but our EU divorce is looking very similar – acrimony is the word for it).

Perhaps the Prime Minister will find a way through to a sensible settlement now she is reported to have personally taken charge of the matter. But as investors we should not rely on such a chance.

One solution is simply to move your share investments into companies that are listed overseas and do most of their business elsewhere than the UK. Don’t wish to buy overseas companies directly? Simply buy one of those “global” investment trusts or trusts focused on particular sectors – Europe, the USA, China, India, et al. Or ensure you invest in UK companies with large exposure to overseas markets other than the EU – there are lots of those.

One aspect that caught my attention this week was the suggestion that the UK should stockpile food and medicines to ensure there were no shortages. But taking food alone, fresh food does not generally keep for very long unless you have a refrigerated warehouse. Even then there are limits. As one supermarket chief was reported as saying in the FT today that it was “ridiculous” and showed “complete naivety”. The reason is simply that supermarkets and their suppliers operate “just in time” systems where deliveries often depend on overnight shipping of goods from Europe. Likewise car manufacturers and other engineering companies rely on complex supply chains that depend on the same “just in time” processes and very quick delivery times. There is a solution to this problem which is to store more items. Non-perishable goods can be stored for a very long time to provide a buffer to the flows of goods. One hedge tactic might therefore be to invest in warehousing companies – Segro and Tritax BigBox REITs come to mind (I own them), although Lex in the FT suggested today that “optimism is already baked in” to the share price of Segro after their interim results announcement. The share prices of those companies have been driven by the internet shopping boom where goods are held in warehouses rather than shops, and rapid delivery is essential. More warehouse demand caused by Brexit might add another wave of warehouse building and increase rents.

When it gets nearer the date next March for Brexit, perhaps we should be doing some personal hoarding of French cheese, Dutch salami and German sausages to guard against short-term supply chain disruptions, but I doubt I will be panicking. UK producers can gear up and many other suppliers in the rest of the world will suddenly find they are much more price competitive. Tariffs on imports of food from outside the EU can currently be very high (e.g. an average of 35% on dairy products which is why you don’t see much New Zealand or Canadian cheese in the shops lately – see https://www.ifs.org.uk/uploads/publications/bns/BN213.pdf for details).

That does not mean of course that food will be much cheaper as the UK Government might impose some tariffs to protect our own farmers, but you can see that it is quite possible that the supply chains will rapidly adapt once we are outside the EU regime. But long haul supply lines will require more warehousing and more dock facilities.

Or our Government could take the Marie Antoinette approach to food shortages – “let them eat cake” she said, or “let them buy British products” instead perhaps. Was that not a past Government campaign which could be revived? Such “Buy British” campaigns ran in the 1960s and 1980s to inform my younger readers. I am of course joking because so far as I recall they had little public impact. They did not have any influence on the preference to buy German or Japanese cars, although many of the latter are now made in the UK. But in a new post-Brexit world we should expect some surprises and the need to change our habits.

One joker suggested we might need to eat more non-perishable food, i.e. tinned peaches rather than fresh. But that just shows that there are ways around every problem. If the current heat wave persists we will of course be able to grow our own peaches. But betting on the weather is as perverse as betting on the outcome of Brexit. All I know is that we are likely to survive it. Hedging your bets is the best approach.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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