The UK and EU – counting the cost of a no-deal Brexit

BY Richard Summerfield

Companies in the UK and European Union could face additional annual costs of £58bn if the UK’s divorce from the bloc results in a ‘no-deal’ Brexit, according to a new report from Oliver Wyman and Clifford Chance.

The financial services industry in the UK would be the hardest hit sector, according to the report. In the EU, the automotive, agriculture and food and drinks, chemicals and plastics, consumer goods and industrials industries would be the most impacted.

'The "Red Tape" Cost of Brexit' report estimates that the direct costs will total around £31bn for EU exporters and around £27bn for UK exporters, with non-tariff barriers accounting for more of the effect than tariffs. The report focuses only on the direct impacts of the UK’s exit from the EU which are of immediate importance to companies for Brexit planning. It does not model additional impacts such as migration, pricing changes or third-country free trade agreements, which are likely to increase the overall impact.

In the absence of an agreement by the end of the transitional period, which is due to begin in March 2019, after the official Brexit deadline, Britain’s relationship with the EU would revert to World Trade Organisation rules.

Just five sectors – finance, automotive, agriculture, food and drink, and consumer goods – would bear 70 percent of the burden of additional costs resulting from this scenario, according to the report.

Kumar Iyer, a partner at Oliver Wyman, says: “There will be both winners and losers from Brexit. In order to navigate the uncertainty companies should be thinking about impacts under different scenarios both operationally and strategically. We see the best prepared firms taking hedges now based on the direct impacts on themselves, their supply chains, customers and competitors. Unfortunately we see that small firms are least able to take these steps at present.”

However, if the UK were to remain in a comprehensive customs union with the EU that provides market access, the costs arising from tariffs would be avoided and some of the border costs reduced.

Yet the chances of the UK opting for a customs union appear slim. In February, UK prime minister Thereasa May reiterated that remaining within a customs union would “betray the vote of the people”. Furthermore, membership of a customs union would prevent the country from striking its own trade deals with emerging economies, including China and India.

Report: The Red Tape Cost of Brexit

Leading companies lack transparency over risks of modern slavery in supply chains, reveals new report

BY Fraser Tennant

Transparency among major companies relating to the risks of modern slavery in their global supply chains is severely lacking, according to a new report by corporate watchdog the CORE Coalition.  

The report – ‘Risk Averse: Company Reporting on raw material and sector-specific risks under the Transparency in Supply Chains clause in the UK Modern Slavery Act 2015’ – examines the statements of 50 companies, as under the terms of the UK Modern Slavery Act, all firms with an annual turnover above £36m are required to publish a slavery & human trafficking statement.

Of the 50 companies under the microscope, 25 source raw materials known to be linked to labour exploitation – cocoa from West Africa, mined gold, mica from India, palm oil from Indonesia and tea from Assam. The other 25 operate in sectors known to be at-risk of modern slavery, such as clothing and footwear, hotels, construction, football and service outsourcing.

The report’s key findings include: (i) top cosmetics companies make no mention in their statements of child labour in mica supply chains, even though a  quarter of the world’s mica (a mineral used to create a shimmer in make-up) comes from mines in Northeast India where around 20,000 children are estimated to work; (ii) chocolate companies do not provide information in their statements on their cocoa supply chains, despite acknowledging that they source from West Africa, where child labour and forced labour are endemic in cocoa production; and (iii) jewellery firms do not include any detail on the risks of slavery and trafficking associated with gold mining, although estimates by the International Labour Organisation (ILO) suggest that close to one million children work in gold mines worldwide. 

“With an estimated 24.9 million people in slavery globally, the level of complacency from major companies, particularly those that trumpet their corporate social responsibility, is startling,” said Marilyn Croser, director of CORE. “Genuine transparency about the problems is needed, not just more public relations.”

While the report focuses in the main on companies that do not report specific risks of slavery and trafficking within their supply chains, some examples of good practice are noted.

Ms Croser continues: “These firms are acknowledging the drivers of modern slavery and situating their response within a broader strategy to respect human rights. We expect other businesses to step up to the mark in the second year of reporting under the UK Modern Slavery Act.”

Report: ‘Risk Adverse: Company Reporting on raw material and sector-specific risks under the Transparency in Supply Chains clause in the UK Modern Slavery Act 2015’

Trump wins election, markets fluctuate

BY Richard Summerfield

The political outsider, Republican Donald Trump, has claimed a historic and stunning victory in the US presidential election, bringing an end to eight years of Democratic rule. The result initially plunged the global markets into chaos and stunned Wall Street.

As Mr Trump’s supporters celebrated his victory, along with Republican successes in both the Senate and House of Representatives, the dollar and US stocks endured a mixed day, falling sharply before recovering somewhat throughout Wednesday’s trading.

European shares initially followed suit. Though many news agencies predicted losses of around 4 percent, the FTSE 100 fell around 1.4 percent initially before recovering throughout Wednesday. In the first hours of trading on Thursday morning, the FTSE continued its gains, climbing a further 1.06 percent, nearing the 7000 mark.

The Mexican peso, however, dropped 13 percent against the dollar at one point, marking the currencies biggest daily move in nearly 20 years. The peso did rebound 4 percent on Wednesday, though it was still down 8.5 percent.

Asian shares rallied in trading on Thursday with the Nikkei climbing 7 percent at one point, following of 5 percent drop in the previous day’s trading. Gains were also seen elsewhere as Australian stocks soared 3.3 percent in the largest daily gain since late 2011 . Shanghai rose 1.3 percent.

Wall Street, which had lent its considerable support to Ms Clinton during the bruising and historic election campaign, was initially left reeling by the result as investors fled some of their riskier assets. Yet US stocks actually closed up on Wednesday, with investors jumping headlong into sectors which could benefit from Mr Trump's election. Oil & gas producers, energy companies and construction firm sand pipeline operators were all seen as attractive investment destinations, given Mr Trump’s preference for oil & gas investment. The fact that the GOP has indicated that it would invest at least $500m in infrastructure development over the next five years can be seen as one of the driving forces behind these gains.

Mr Trump’s views on the Dodd-Frank reform act, implemented in the wake of the financial crisis, as well as other notable Democrat legislation including the Affordable Care Act, have also affected stocks; healthcare companies fell as the markets anticipated the end of Obamacare.

Oil markets, which have steadied in recent months following two years of uncertainty, fell temporarily below $45 a barrel on Wednesday morning, as the wider global commodities market reacted to the election result with some concern. The global benchmark, Brent Crude, fell to its lowest point since August, down 2.3 percent to $44.98. However, oil prices rebounded on Thursday; at the time of writing, Brent Crude futures were up 1.14 percent, or 53 cents, at $46.89 per barrel. Though the outlook for the commodities market still appears contentious, there is hope that a recovery in the oil & gas sector in 2017 may be relatively rapid.

News: US stocks, bond yields jump after Trump shock, Mexican peso falls

Asian growth slower and profits elusory, says new EY/HBR Analytic Services report

BY Fraser Tennant

Opportunities for companies in the Asia-Pacific region to grow are fewer and profits more elusive, according to a new report by EY and Harvard Business Review (HBR) Analytic Services.

In ‘Asia: Time to Refocus’, EY/HBR Analytic Services note that despite Asia having been a major source of growth for multinationals and private equity firms for 20 years, expected profits have not materialised and the current outlook is that the land-grabbing strategies of old are no longer sustainable.

Moreover, the Asia-Pacific companies that once relied upon an almost unlimitless potential for growth but that are now struggling to adapt their products and value propositions, are being advised to adopt a ‘depth-over-breadth’ capital strategy in order to re-engage with the region’s complex business environment. 

“Asia today is not the Asia of 20 years ago, or 10 years ago, or even five years ago," said Vikram Chakravarty, EY’s Asia-Pacific capital transformation and operational transaction services leader. “It continues to grow faster than most developed economies, but more slowly than it did in the past.

“It remains a region of great opportunity, but also one where profitability remains elusive for those unwilling to invest the resources necessary to tailor their offerings and business models to its individual markets.”

The challenge for companies in the region, says Chakravarty, is for them to identify how and where they should be focusing their capital and other resources, and also where they should be taking a step back.

To do this, the EY/HBR Analytic Services report advises companies looking to transition to a new capital strategy in Asia to: (i) conduct a portfolio review; (ii) launch a large-scale cost-cutting initiative to improve profitability; (iii) right-size their go-to-market models; (iv) reorganise to emphasise country over category; (v) plan a path to exit, and limit losses, where market leadership and profitability are not realistic; and (vi) double down in priority countries by undertaking transformative deals — big-bang M&A transactions and partnerships — to boost market share quickly.

Chakravarty concluded: “Companies that have yet to see Asia’s promise cascade to the bottom line must determine where they have a path to profitability and focus their attention there. Depth, not breadth, will win the day.”

Report: ‘Asia: Time to Refocus’

Structural reform needed now – OECD

BY Richard Summerfield

Though we are eight years removed from the last financial crisis, growth in the global economy has remained patchy at best. Improvements in advanced economies have remained subdued and the world’s emerging economies, once engines for growth, have also begun to splutter and fail. Global trade remains sluggish and overall investment has been weak. The stuttering Chinese economy in particular has hindered global growth over the last year or so, increasing global volatility.

With global growth prospects likely to remain cloudy for some time, the Organisation for Economic Cooperation and Development (OECD) has called upon the world’s 20 biggest economies to rise to the challenge and act quickly in order to improve growth. According to a recent report from the OECD – the 2016 Going for Growth Interim Report – the G20 nations must improve the pace of structural reform to boost global economic growth.

As it stands, the G20 countries will likely miss their 2014 pledge to boost their combined GDP by 2 percent by 2018. “According to the joint assessment by the International Monetary Fund, OECD and World Bank…more effort is needed for the full and timely implementation that would be needed to meet the GDP objective", says the report.

Two years ago the countries had promised to implement around 800 reforms in total; however delivery of those reforms to date has been substandard, according to the OECD.

Though some progress has been made in terms of recent structural reform, countries must do more to quicken the pace of change. "Global growth prospects remain clouded in the near term, with emerging-market economies losing steam, world trade slowing down and the recovery in advanced economies being dragged down by persistently weak investment," the OECD says. "The case for structural reforms, combined with supporting demand policies, remains strong to sustainably lift productivity and the job creation."

According to the report, the pace of reform was generally higher in Southern European countries like Italy and Spain, than among Northern European countries. Outside Europe, the reform leaders were Japan, China, India and Mexico.

The OECD has called upon the G20 nations to improve their policy coordination moving forward, as policy synergies will help stimulate growth.

Report: Going for Growth Interim Report