Why not everything is necessarily about Brexit

With UK Prime Minister Theresa May still trying to achieve a withdrawal agreement from the EU that will get through the UK Parliament, and little sign of meaningful negotiations between the two sides as we write, it appears that the issue of what Brexit looks like will go down to the wire. Bearing in mind that the withdrawal agreement will not contain a trade agreement, but will rather define the terms under which it will be negotiated, it is understandable if readers are experiencing a significant case of ‘Brexit fatigue‘. However, with the main issues being covered thoroughly in the media on an hourly basis, and we would not want to repeat them here (as we share a degree of that fatigue), there are some interesting issues to note, even within the larger headlines.

One such issue was Nissan’s decision to build their new X-Trail SUV in Japan alone, cancelling plans to do so in Sunderland in the UK as they had planned originally. Following on from leading Brexiteer James Dyson’s decision to move his company’s headquarters to Singapore, this was seized on by many reporters as another example of the negative economic impact of Brexit uncertainty. This position seemed very reasonable given the comment of the firm’s Europe chairman, Gianluca de Ficchy, who said that “the continued uncertainty around the UK’s future relationship with the EU is not helping companies like ours to plan for the future”. However, he was also clear that Brexit was only one factor, and the reality is probably less one dimensional than has been portrayed by some, with there being two other reasons why a decision to concentrate production in Japan makes sense.

Firstly, Nissan had always intended to manufacture the new X-Trail in Japan at their Kyushu plant, with Sunderland being a second production site. With every new model requiring a new production line to be built, or at the very least an existing one modified, that would have required significant investment in both plants. However, with Japan having just signed its trade agreement with the EU, which comes into force this month, there is less obvious need to have production within the EU. It is telling that production has been concentrated in Japan and not, as had been rumoured, moved to France. With reduced barriers to exporting cars from Japan into the EU, the attraction of adding an additional shift at the Kyushu plant and halving the investment in new production lines is obvious.

Secondly, whilst all non-electric cars are in the firing line, diesel cars are most so and Sunderland is a plant that produces primarily diesels, whilst Kyushu’s expertise is in petrol engines. With sales of new diesels having fallen by 30% in the UK in 2018 according to the Society of Motor

Manufacturers and Traders (source: BBC News), it may well be that Sunderland is a victim of trends in environmental standards as much as Brexit, and this may well be a problem for Sunderland’s long term future. Therefore, whilst the uncertainty surrounding Brexit is not helpful to anyone in terms of making business decisions, it is perfectly possible that Nissan would have come to the same conclusion even if the UK had voted to remain in the EU.

The other thing that was noteworthy was the reaction of the local population to the news, as contained within a report on Bloomberg. Whilst the announcement meant new jobs would not be created rather than that existing jobs would be lost, as Nissan stated that it is committed to continuing production of the current Qashqai, Juke and Leaf models in Sunderland, as well as the new Qashqai from next year, unions were quick to voice their concerns that, without another new model being produced in the UK, the long-term prospects for the plant were much reduced. In such circumstances, media coverage would typically be full of people asking why the government had not done more to protect their livelihoods, even if the impact was not immediate. Indeed, a feeling of disenfranchisement from Westminster and their politicians is acknowledged as a major reason that people in the north of England voted ’Leave’ in the EU referendum, even if making such a protest vote on a European issue is not immediately intuitive. However, with the news being given the veneer of being Brexit-related, most were surprisingly stoic, with many showing what Bloomberg described as “defiance”, claiming that the warnings about potential job losses are scaremongering to postpone or cancel Brexit. It will be no coincidence that, with Sunderland having one of the largest majorities in the UK in favour of leaving the EU, people are aware that they have to acknowledge their own role in the situation that has arisen. Therefore, whilst some people were complaining that the Brexit process was taking so long, there is little sign of people wanting to backtrack on their original decision. This may be a product of referendum politics, a concept that is largely alien to the UK, and is certainly noteworthy.

In summary, political issues continue to present us with hard to call outcomes that are often binary in nature, and political risk remains at an elevated level. However, with perception being everything in politics, it is important for investors to look past the headlines to ascertain the real underlying causes of events. Diversifying around binary political outcomes remains the best strategy but, where the causes are more economic than political, we can position more meaningfully. Therefore, drilling down to sort politics from economics is key in the current climate.

The information provided above is for Professional Advisers: All data has been sourced from Lipper. Any investment must be made in conjunction with reading the relevant KIID or Investment Mandate. Clients should be aware that the value of investments and the income from the may fall as well as rise and they may not get back the amount originally invested. Investors should note that the views expressed and information given were current at the time of publication but may no longer be so and/or may have been acted upon by the Investment Manager already. Source SmartIM