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18 January 2021

Brexit Looms over UK Retailers

After a strong start to the year, global markets were fairly subdued last week. As of Friday 15th January, the FTSE 100 was down -1.72% from the previous week’s close. In comparison, the US S&P was down -0.83% and the Euro Stoxx 50 -0.54%. The caution from investors comes with the growing consensus that equity valuations continue to run higher, while countries across the world are dealing with the most challenging part of the pandemic thus far.

Last Tuesday, the British Retail Consortium (BRC) reported that annual retail sales decreased by -0.3% on 2019, the worst annual change since the BRC began recording the statistics in 1995. Despite this, food sales growth rose 5.4% with many consumers stocking up, and returning to the ‘big shop’, in fear of prolonged lockdown measures. Online non-food sales increased by 44.8% whereas retail non-food sales fell around -5%. The figures demonstrate the rapidity of the ongoing transition to online shopping and change in consumer trends, which has been catalysed by COVID-19. A report from The Centre for Retail Research further illustrates this, stating 2020 was the worst year for high-street job losses in the last 25 years, with nearly 180,000 retail jobs lost.

Brexit also loomed over UK retailers last week as M&S suspended hundreds of products from its Northern Ireland stores. The decision came after competitors experienced long delays at UK ports. It is reported that an entire shipment can be held up if only one item has the incorrect customs form filled out, with some forbidden from crossing the Irish Sea at all. Additionally, retailers that use the UK to re-distribute products to the EU may face additional tax, exemplified this week by the hold up of Britain’s much-loved Percy Pigs from retailer M&S. The sweets are produced in Germany then shipped to the UK, but if M&S were to then send them to Ireland, it could be subject to extra tariffs. Such difficulties show that Brexit hurdles will continue for UK companies as they re-define their processes.

Looking globally, Donald Trump’s parting gift to China introduced a ban on all new investments related to Chinese Military-linked companies. Consequently, JP Morgan, Goldman Sachs and Morgan Stanley have announced they will be delisting 500 structured products in Hong Kong.  The executive order came into effect on Monday and listed 35 companies including: China telecom, China Mobile and China Unicom.

As a result, the MSCI, FTSE Russell and S&P Dow Jones indices have removed the three telecom companies from their indexes, along with the NYSE and LSE reporting that the shares will be de-listed from their exchanges. The Hang Seng index has chosen not to remove the companies yet, potentially forcing companies and investment managers to move funds elsewhere in a bid to comply with the newly imposed US Sanctions. According to the Hong Kong Exchange, they believe sanctions will not have a material adverse impact on Hong Kong’s structured products market, with the 500 products accounting for less than 1% of Hong Kong’s turnover. Although the Hang Seng index seems unfazed by the news, up 1.27% from last weeks close, China Telecom has fallen 17.9%, China Mobile 12.8% and China Unicom 11.4%, since Donald Trump signed the order back in November.

China has not bowed down without a fight, however, as a new ruling allows Chinese citizens and companies to sue for compensation if damage has been caused as a result of another person or company conforming with foreign restrictions. Global companies with involvement in China must now act cautiously as they find themselves in the middle of a trade-off, trying to avoid claims from Chinese entities on one side and sanctions from the US on the other.

In response, Trump has since updated the legislation, extending the ban to holding shares in any of the 35 Chinese companies. US investors must now debase any shareholdings by November this year, with Swiss Bank UBS stating clients within Europe and Asia are poised to take advantage of the sell-off.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Brexit Looms over UK Retailers
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