Interactive Brokers’ senior market analyst Steven Levine provides a brief look at the uncertainties in the UK’s retail sector. With the unfolding of Brexit in 2020, it will likely reshape corporate strategies.
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Produced on January 3, 2020
The recent victory of UK prime minister Boris Johnson and his Conservative Party in the general election has essentially solidified the nations’ departure from the EU.
This in turn has created greater complexity for the UK’s retail sector, as it adjusts to the unfolding of Brexit in 2020. Analysts at Janney Montgomery recently noted that although the UK election provided the global financial markets with clarity about Brexit, many investors are now considering what that exit will mean for the UK, “including more expensive goods and possible economic pressures.”
Against this backdrop, the UK retail sector, which already contends with an increasing drive away from physical stores and towards online marketing and sales, is also fraught with concerns about how the UK’s departure may reshape the industry’s operations – especially concerning supply chains and the adoption of new regulatory requirements.
William Bain, a policy advisor on Brexit and international trade at the British Retail Consortium, observed that following the election win, attention has quickly turned to the shape of the future UK-EU trading relationship.
He pointed out, for example, that retailers moving goods between the UK and France will need to be cognizant of the new requirements in any UK-EU trade agreement, depending in part on the tariff relationship between both sides.
Meanwhile, some of Britain’s larger retailers unsurprisingly consider Brexit among their primary concerns, as they ramp up on strategies to effectively manage the heightened risks.
Peter Cowgill, JD Sports Fashion’s executive chair, said that in preparation for a disorderly Brexit, the company “always expected that, for operational purposes, a European warehouse would be required sometime after 2021, with the risks associated with Brexit bringing this decision forward.”
Other UK retailers have also developed extensive risk management structures to deal with Brexit-related eventualities, including British clothing, footwear and home products company Next, which has highlighted potential direct impacts on costs and operations, including from increased tariffs, as well as indirect risks stemming from changes to the wider operating and economic environment, such as a weakening of local currency or customs-related bottlenecks at ports.
In the meantime, consumers’ appetite for spending has largely remained intact despite a high degree of Brexit-inspired uncertainty and pessimism expressed by Britain’s business community.
In fact, the Bank of England noted in its November monetary policy report that consumer spending has been “more resilient to the uncertainties around Brexit,” albeit these appear to have weighed on some discretionary spending and housing.
Investors will likely be paying close attention to how the UK retail sector will adjust to the potential impacts from Brexit, as uncertainties become clearer over the course of 2020. In the very near-term, economic updates in the week ahead include Markit’s UK Services PMI and New Vehicle Sales at the front part of the week, followed by the Halifax House Price Index and final reading of third quarter labor productivity by mid-week.
In the meantime, you can find more details on this topic in my full report available now on IBKR Traders’ Insight – you can also select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more. I’m Steven Levine with Interactive Brokers asking you to enjoy the week ahead.
Disclosure: Interactive Brokers
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