Remember Brexit? At the end of January, as Britain left the European Union, a bold chronicler might have been tempted to pre-write pages for 2020 in the history books. After months of deliberation, acrimonious wrangling and contrasting forecasts, this was the year that it finally happened. The UK, having trudged for four years through repeated promises of sunlit uplands from one side and apocalyptic warnings from the other, would at last find out what lay beyond the EU.
Nobody, whether they proudly waved a Union flag or shed a tear on the night of January 31, could have forecast what lay ahead. Within two months Covid-19 had usurped Brexit’s place at the top of the agenda.
The virus, which delivered blows to growth and employment, remains the central focus throughout government and the economy. Industry leaders confide, with frustration, about their struggle to persuade small companies to consider the impact of an event as abstract as the pending departure from a single market and customs union.
Departure from the union may no longer fill front pages and fuel angry political debate on a daily basis, but Brexit is very much happening. An 11-month transition period will end on December 31 and ministers, perhaps scarred by several last-minute delays to the UK’s initial exit, insist there will be no extension.
This gives officials on either side of the table barely 100 days to finalise an agreement on free trade. The mood remains downbeat. David Frost, the Downing Street chief negotiator, bemoaned “little progress” in talks last week and warned: “Time is short for both sides.”
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The question of whether Britain manages to finalise an agreement with Brussels in time is a political and diplomatic fork in the road for Boris Johnson’s administration, but the economic realities at borders and in boardrooms up and down the country are more nuanced. This is not merely a binary case of deal or no deal any more; key trading businesses are preparing for disruption regardless. A light free trade agreement focused on tariffs, for example, is unlikely to prevent myriad checks and regulations that would force thousands of companies to navigate red tape.
On this side of the Channel, the government is rolling out a “check, change, go” campaign designed to ensure that companies of all sizes are ready. After spending billions of pounds in an attempt to draw the British economy out of its coronavirus-induced paralysis, ministers are aware that Brexit risks halting the recovery in its tracks.
Investors must approach this moment with caution. It remains unclear whether January 2021 will be a blip or a bang on the London market, but some companies are more vulnerable than others. Banks and builders are among the stocks most commonly deemed to be bellwethers of the British economy.
Before Covid-19 dragged the FTSE 100 index (which had been on its way to new highs) to an eight-year low in weeks, many in the City thought that June 24, 2016 — the morning after the referendum — was a bumpy ride. Whether there will be turbulence as Britain finally strikes out from the EU is not in question; the big uncertainty is just how much turbulence and for how long.
Lloyds Banking Group
The lender is preparing for internal upheaval as António Horta-Osório, its chief executive, heads for the exit after a decade. It is perhaps the most exposed of London’s heavyweight listed banks to the twists and turns of the British economy, with 26 million customers.
Lloyds is in good shape, with a cost-to-income ratio of 52.3 per cent. It produced a pre-tax loss of £602 million in the first half, however, after taking a provision of almost £4 billion for bad debts. The outlook, it observed, was “highly uncertain”. The shares have been hammered during Covid-19 and remain at less than half the level at which they started the year. The start of 2021 will be a turning point for the economy, however, and the scale of the pandemic’s impact has yet to be determined. Avoid.
Ibstock
Anyone wanting to scrutinise the mixed picture in the construction sector should take a look no further than Britain’s biggest brick manufacturer. Its shares are only fractionally above the 43-month low they hit when coronavirus crippled activity in the spring.
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With demand still under par this summer, analysts downgraded their profit estimates for Ibstock. “While there have been some encouraging recent signs of a pick-up in new housing, our hopes of a ‘V-shaped’ recovery look too optimistic,” Clyde Lewis, of Peel Hunt, the broker, said.
Should Brexit throw a further spanner in the works, disrupting an industry that is already fragile, this company will come under further pressure. Hold.
Savills
A year ago the estate agency said that the housing market was “pretty much flatlining” because of Brexit uncertainty, with fewer residential and commercial deals. Some clarity emerged within months, before Covid-19 surfaced.
The chancellor offered the housing market a shot in the arm this summer, granting a stamp duty holiday that has provided a
much-needed boost after the lockdown, but this will last only until next March.
Shares in Savills have recovered by a pound since the spring. However, Brexit is unlikely to prove a helpful backdrop for those hoping for a swift and consistent recovery in activity. Avoid.
ITV
This month Tempus outlined the damage that the broadcaster has suffered, with advertising revenue down 21 per cent at £671 million and production revenue down 17 per cent at £630 million in the first half.
Should Brexit deliver a further hit to the economy, ITV will not be immune. That said, unlike the fallout from Covid-19, the pain would be confined to its advertising sales. Its Studios production business, which has been growing exponentially, should help to partially offset a slump in marketing budgets.
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While the company appears set to soon lose its FTSE 100 status, medium-term obstacles are unlikely to knock its production powerhouse further off course. Buy.
