Visiting your local supermarket recently, have you noticed something odd? Apart from customers still wearing masks of course, and washing down their trolleys and baskets with disinfectant, and studiously ignoring each other as they do the dance of the seven veils in the aisles in an attempt to maintain a distance of 6ft 7 apart. But nothing else odd?

 

Precisely! There is nothing odd. Odd would be the shelves being empty, queues at the door, rationing of goods. Six months on from Brexit when the doomsayers were determined the UK economy would have ground to a halt even without Covid, the ability to access goods imported from the EU seems remarkably straight forward. And the same is true in reverse: as if by magic, or some sleight of hand, we still seem to be selling goods to the EU too.

Optimistic UK trade data

It is quite correct that there was a reduction in the efficiency with which goods moved to-and-fro between the UK and the Continent in the early weeks of 2021 as Customs, the ports authorities and businesses on both sides of the English Channel learned to cope with the additional post-Brexit paperwork and physical checking of goods. But all the fears of trunk roads outside Dover, Felixstowe, Hull and Immingham degenerating into paralysed, grid-locked lorry parks came to nought.

 

Trade with the EU certainly fell in January and February, partly because of the disruption, partly because of new Covid lockdowns being imposed both here and in the EU. But the most recent Office of National Statistics trade data shows that in April, the UK exported £26.6bn of goods worldwide, and imported £38.5bn; we are a net importer of £11.9bn. £12.9bn (48%) of our exports were to the EU, an improvement of £300m on the March figure; we imported £18.4bn in return, again an increase on March of £600m, thus in April we had a negative trade balance with the EU of £5.4bn. But our non-EU exports totalled £13.6bn (52%), with imports of £20.1bn, much the majority traded under WTO rules. What the data also reveals is that over the past 12 months, albeit disrupted by Covid, in nominal terms imports from the EU have remained essentially stable but consistently exceeding those from non-EU countries, but the last three months shows a steady increase in non-EU imported goods to the extent that they not only exceed the value of goods being imported from the EU, but the gap is widening.

 

One must be careful about extrapolating short term data, particularly with trade which can be affected by seasonality and exchange rates, and in the period under the spotlight when supply chains have been disrupted due to Covid. However, with the UK having now left the EU, and with the government pressing ahead with a raft of new trade agreements, the latest of which is with Australia (negotiated from scratch in a matter of months rather than years) to add to those already in place with Japan and India, alongside ongoing talks with the US, Boris is setting his sights more broadly eastwards: he has already opened negotiations for the UK to join the Trans Pacific Trade Partnership. It may well be that “Global Britain” becomes a reality rather than an electioneering strapline. So long as GDP continues to develop longer-term at a decent rate (2% would do nicely) and trade with both the EU and the rest of the world grows, there should be no embarrassment that the proportion conducted with the EU reduces as a percentage; after all, 85% of the global economy is found outside the EU, opportunities further afield abound notwithstanding the EU’s geographic proximity with us.

The Gordian Knot that is Northern Ireland

The significant fly in the ointment about our future relationship with the EU, however, is Northern Ireland. The ramifications of the imposition of the customs barrier down the Irish Sea leaving Northern Ireland, definitively a part of the United Kingdom (despite President Macron’s suggestion to the contrary), subject to EU and European Court of Justice jurisdiction on the movement of goods are all too apparent. There is little point discussing the complexity of the background, the over-arching need to uphold both the letter and the spirit of the Good Friday Agreement involving the UK, the Irish Republic, Northern Ireland Unionists and Nationalists, and the US as the legal guarantor (note, the EU is not a party to the Agreement). Suffice to say, from the moment the UK government agreed to the terms of the Brexit Withdrawal Agreement and the Northern Ireland Protocol, it was entirely predictable that the new framework was unworkable. It remains a subject of speculation as to whether the Westminster government believed with its new majority after the 2019 election that the sensibilities of Northern Ireland could be carelessly trodden on, or if, as Cabinet Secretary Michael Gove once let slip, the intention was to sign the treaty “to get Brexit done” with the idea of re-negotiating the contentious elements later.

 

Whichever path, the result has been inflammatory. For the people of Northern Ireland, the situation is politically divisive, charged and toxic; it is a significant headache for the Irish Republic too. At heart is the question of sovereignty, the right to self-determination. Leaving aside the fact of reneging on a treaty, the political risk for Boris is that on top of facing a referendum on Scottish independence, were he to ‘lose’ Northern Ireland, by definition the United Kingdom would cease to exist. The EU is also reluctant to shift its ground: it knows it has a legally enforceable treaty and all it would like to see is proper implementation, failing which it will impose sanctions under Article 16 of the Protocol. Politically, as an inherently protectionist bloc, it will mind its own interests above any others. With transition timetables rapidly running out, and with neither side showing willingness to compromise, it is quite possible that the trade deal collapses and the UK and the EU resort to exchanging goods under WTO rules with all the consequential frictional costs. That in turn risks compromising the Good Friday Agreement if it represented the imposition of a hard border between the North and South of Ireland where tariffs would be collected. To use a culinary analogy, the situation is akin to multiple chefs attempting to make a single omelette: they all know they must break eggs but none wishes it to be their own; something has to give somewhere!

Investment risks from an EU trade war?

From an investment standpoint, there are risks but arguably they are fewer than half a decade ago. With the paperwork and checking of goods already in place between the EU and the UK, the only additional stress would be the payment and collection of levies, already standard procedure on the trade conducted with non-EU countries. Applying tariffs to nearly half our trade could have both a competitive and an inflationary effect on the economy, but the safety valve is available through the exchange rate. As new agreements are reached, the proportion of UK trade which bears no tariffs increases, so helping mitigate against the overall frictional costs of doing business.

 

In 2016 at the time of the Brexit Referendum, many thought we were taking a blind leap in to the unknown. While a sensible accommodation with the EU over Northern Ireland would be preferable, the bigger picture in 2021 is different: it is not that it is nothing to worry about so much as history suggests that the business community is ultimately pragmatic and adaptable and will deal with whatever it is presented with.

 

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