Made in Britain

‘Rules of Origin’ might sound like the sequel to ‘Game of Thrones’ but with under a year to go to the Brexit Article 50 deadline could prove significant. It is effectively how you define where a product comes from and whether we can say ‘Made in Britain’. For some industries, this could prove quite a task due to global supply chains. For example, 55% of a car’s components must be made in a country to be considered as locally manufactured. The Society of Motor Manufacturers and Traders estimates that the average car manufactured in the UK currently has only about 44% UK component content. However, given sub-contractors down the supply chain source components from abroad, this content could drop to 25%.

PM Theresa May’s government is committed to leaving the single market and the customs union. The main advantage of being in the customs union is that there are no tariffs charged on goods traded between member states. The disadvantage from a UK perspective, is that it loses the ability to negotiate its own trade deals with the rest of the world. The UK wants a free trade agreement with the EU but, leaving the customs union will have a big impact on ‘Rules of Origin’. Hopefully, a free trade deal would allow both the EU and UK to consider value added in the other jurisdiction as local. However, the Food and Drink Federation has already warned that food made in the UK such as chocolate bars and pizzas, could fail to meet rules of origin if a Canadian style free trade deal was agreed with the EU.

Either way, while UK businesses currently suffer from a mountain of EU red tape, there could be significant administrative and legal costs for some businesses to prove the origins of their goods. The task for both teams of negotiators is to come up with a new agreement that limits the disruption to UK and EU supply chains.

What have we been watching?     

A shorter and quieter week activity wise in the UK due to the Easter break. It’s a strange old world at the moment but volatility is back with a vengeance.

Trade wars have continued to dictate the direction of equity markets. Is President Trump using tariff announcements as a means to get countries to the negotiating table? If he is, then this would appear to be a dangerous strategy, but is very much in keeping with his character.  The World Trade Organisation has warned that global economic growth could fall ‘quickly’ if Washington and Beijing were to push ahead with trade tariffs. Meanwhile, in response to the earlier steel and aluminium tariffs, China has confirmed that it will increase tariffs on a wide range of US goods, with additional tariffs of up to 25% to be imposed on pork, wine and scrap aluminium.

US equities remained volatile recording their biggest one-day rise since August 2015 before falling as technology stocks suffered another sell-off.  The NYSE FANG+ Index includes ten of the world’s largest global technology companies. The five largest US technology and internet companies account for more than 14% of the S&P 500 index while the technology sector accounts for 27% of the S&P index, making it the largest sector component. Since hitting a peak in mid-March 2018, the NYSE FANG+ index has fallen 15%. This has been caused by data and privacy issues, as well as safety issues relating to driverless car testing. President Trump has also launched an attack on Amazon saying it pays little or no taxes and is putting thousands of retailers out of business.

The initial rally, early last week, ahead of the subsequent technology sell-off was helped by a much more diplomatic tone from the White House regarding trade tariffs. Following US Treasury Secretary Steve Mnuchin’s comments about being ‘cautiously optimistic’ that China will reach a deal to avoid tariffs, the White House trade advisor, Peter Navarro said that the Trump administration is ‘actively’ involved in talks with China to resolve the recent trade tensions between the two nations.  In addition, Chinese Premier Li suggested that negotiations would continue, to ensure that both US and Chinese firms retain access to each other’s economies. Markets were initially encouraged by the comments from both the US and China. However, China’s subsequent confirmation of 25% tariffs on some US goods has made markets uneasy.

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International Trade Secretary Liam Fox said the UK hopes to have 40 trade arrangements with 70 countries in place by the end of the Brexit transition period in 2020. He said he hoped to ‘roll over’ the existing arrangements with the EU agreements and that all those countries had been spoken to and had agreed they would like that outcome.

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In the UK, people are moving home half as often as they did before the credit crunch. This is not just because of an aging population and higher stamp duty. It’s the interaction between tighter mortgage regulation and the housing market. This is restricting how much people can borrow and how much equity they need to trade up the housing ladder. The Nationwide revealed that annual house price growth remained subdued in March at 2.1%. Meanwhile, the household saving ratio fell to an annual record low of 4.9% and households were net borrowers for the first time since records began in 1987.

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In Europe, investors continue to monitor political developments in Italy closely. The anti-establishment 5-Star movement and Lega party appear to be making some progress towards forming a coalition government. The spread on Italian bonds over other EU long-term yields have widened.

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In Japan, the Tankan Q1 manufacturing survey showed the first deterioration in overall confidence in two years, perhaps reflecting concern about a global trade war.

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Brent oil remained around $68 on market concern about more ‘hawkish’ US policy towards Iran. A withdrawal by the US from an international agreement to curb Iran’s nuclear programme would see the re-imposition of trade sanctions which could disrupt between 250-350,000 barrels of Iranian oil exports.

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Finally, a sign of the times? Following the school shootings, protests and demands for greater gun control in the USA, news that Remington, the oldest gun manufacturer in America has filed for bankruptcy.

Read Last Week’s Alpha Bites – Trade War, What is it Good For?

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.