No deal, No problem

Our CFO lunch came at the end of a tumultuous week in politics last week so there was only one topic of discussion to be had….’Brexit’…this week is continuing to be another strange week in Parliament. Who knows what will transpire over the coming weeks?

 

Last week saw extraordinary events unfolding in British politics; The Speaker of the House of Commons dug up an ancient law to give him the right to refuse another vote on the current withdrawal agreement, unless it's significantly different. We also saw a short extension granted by the EU, until just when, depends on whether Theresa May's agreement can be heard for a 3rd time and if it is passed. All options from 'No Deal' to revocation of Article 50 remain on the table but by April 12th if the current withdrawal agreement is not passed, the UK must indicate a way forward.

With our latest CFO lunch falling at the end of such a tumultuous week, there really was no other topic that we could discuss. Assuming we would leave with a deal and after the short delay already granted, (during the transition period the government would negotiate the future relationship with the EU), we asked the question; “What are the important factors for your business and wider sector for this new relationship with the EU?”

We're treating it a bit like the Millennium Bug, hopefully it won't happen!

Our opening comment was from Liz Collins, ex Interim CFO for Wilko, who said “As an interim you don't tend to expect security so the fact we've got uncertainty is not something that is a concern to me.” What she does care about is the environment that has been created, “People need to have clarity about how they can build their futures  and what I am finding in the UK is that the whole country has ground to a halt in this Brexit treacle and nobody's doing business.”

Alan Bergin, Commercial Group FD, of PZ Cuzzons Plc, said the FMCG sector is looking for the Brexit conclusion to improve consumer confidence as their products are 'on deal' every week, so whatever it brings as a conclusion will be favourable because it is a conclusion. He then went on to say, “The other areas of focus are around the cost base. It's costly enough doing business but you worry about what will be next [in terms of costs], so warehousing's gone up and you hear the scare stories about large organisations having stockpiled and booked it all out.

The question for us as CFOs is what's going to be our strategy and maybe being part of Europe has made us look more internal than external.

Reiterating Alan's comments, Himanshu Raja, CFO of Countrywide PLC, the UK's largest property services business, both B2B and B2C, said, “It's all about consumer confidence for us, the ending of the uncertainty itself, be that a deal or no deal, will be a catalyst for the UK and for business to adapt. We underestimate the strength and power of business to adapt to the environment it faces. We've lived through 2008/09 when we thought the world had ended and lived through the dot com bubble when we thought the world had ended. Business is incredibly resilient but in the boardrooms of business you need some certainty so you can commit capital in order to make those investment decisions which are often multi-year.”

Echoing the previous comments Jamie Lyon, European CFO/CCO at La Salle Investment Management, said he had more confidence in business leaders than politicians and “Once we arrive at some sort of certainty whatever that may be, the business leaders will just roll up their sleeves and get on with it.”

Simon McIntosh formerly the CFO of a large Toy Group said post Brexit, we need to make sure the standards throughout Europe are uniform. Generally toy standards are very high and he didn't think either side of the Channel disagrees with maintaining the standards but, if we haven't got that, then this will add a lot more cost for consumers.

“The UK is the largest toy market in Europe with the majority of products imported from China and paid for in US$. Following the referendum Sterling has depreciated against the US$ by 17% and so, to a certain extent, Brexit has already taken place as the cost of toys imported into the UK has increased. The consumer has not borne all of this increase since it has been shared amongst the whole supply chain however it has borne some, even if is not immediately obvious, for example by the toy industry reducing the number of toys in a pack whilst keeping the retail price the same."

Neil Kay currently CFO with a global property consultancy said that from his businesses' perspective everyone just wants certainty … “We're quite agile, we're not timid at the top level, we just want to know what to react to.”

Reacting to one of Neil's comments, likening the property market to a 'breakwater' that's built up as money is still there, Himanshu said they see enormous pent up demand in the residential market too. He went on to say “It's completely irresponsible for the Governor of the BoE to say that property prices are going to drop by ~30%, on the basis that if you look historically at it, there is no basis for this but it does spook consumer confidence. The end result is that both buyers and sellers are waiting. Why would you commit to a residential purchase and risk negative equity in today's climate?”

We've lived through 2008/09 when we thought the world had ended and lived through the dot com bubble when we thought the world had ended, business is incredibly resilient.

Jamie Lyon then pointed out that foreign banks are wanting to lend to the UK and there are a lot of positive statements from around the globe and that gives him a lot of confidence. Picking up on this point Himanshu said we're awash with liquidity and there's a huge amount of money looking to go to work. Liz agreed with them and mentioned a meeting she had with a partner at a restructuring firm, she had asked; “Why aren't we seeing more re-structuring opportunities in the retail market in particular?” The answer was that the bankers have taken their feet off the throats of the businesses and they're letting them have more liquidity at the moment because of Brexit uncertainty. They're leaving them alone and the banks couldn't afford to do that if there wasn't a lot of money around. Once Brexit comes into play then of course the discipline is going to be put back in place. Himanshu mentioned the mortgage market at the moment, saying that there's never been a stronger borrowing climate.

The CFO of a financial services credit business made us aware that they monitor the macro picture very closely and look at a broad barometer of indicators. He said that “What's interesting is the macro picture has tracked relatively stable, which shows that the UK economy has been remarkably resilient.” He agreed that for business it's about the certainty, saying “We all want to get on and we all spend a reasonable time talking about Brexit but what are we going to do and how do we move forward and get out of it?”

Andrew Ring, Hitachi Capital's Group Director of Finance, agreed with the previous guest, that certainty is good for business. They are still seeing businesses investing but they are investing less than they expected to. He said “The counter to that is that without that investment and without those productivity improvements, what it has resulted in, is higher employment. There is this odd counter-cyclical happening beneath the water of higher employment starting to feed into higher pay rates that is counter to this consumer lack of confidence. Do we really understand the point at which investment comes back and the impact that future productivity improvements may have, depending on how we Brexit? How will it impact the employment market? If business is making more money, business profitability is growing but actually the environment for people, particularly in the low end jobs, where their wages suddenly start [reducing]… , does that become a negative and what are the political consequences of that?”

Himanshu agreed with Andrew's observations about the contradictory signals of full employment and the flip-side of which is the lack of productivity because there hasn't been the transformational investment year on year in order to be more productive,  the consequence of which will be high levels of unemployment. He continued by saying “In a world where immigration is controlled at the lower end and then the very people who voted for Brexit are arguably those that are going to suffer the most economically… so what are the unintentional consequences of this cycle?”

Our chair then interjected saying that the broad headlines from our recent CEO lunch were that businesses were expecting to increase headcount in the next 12 months. She asked, “During this transition period, when we talk about freedom of movement and access to talent, what do you think businesses want to end up with?”

Andrew Ring opened by saying “Business wants full freedom of movement and businesses are directly incentivised for as much movement as possible because the more movement - the more opportunity. If you can attract people, the less impact it has on salaries. But there's 'what does business want versus what do the people in the country as a whole want?' And that friction [between the two] is going to need to be managed.”

Jamie then mentioned that there's also a divide between what the South East and London wants versus the rest of the UK and the regions. Andrew reiterated this saying that the cities voted generally to stay and others voted to leave and yet they'll be more impacted by leave than the cities will.

We're quite agile, we're not timid at the top level, we just want to know what to react to.

Kevin Hayes, CFO from River and Mercantile Group, an asset manager, said “Generally we're [CFOs] the realists in business but what the last two years have done has distracted us. So the question is no matter where we end up, how competitive are we in a global economy that has now moved on?” Over the last two years the US and China have accelerated their growth. He went on to say that “There is a huge opportunity and it's very exciting for us to actually get back to basics of competing on a more broad scale basis. We're a huge importer of product, that's largely been from Europe but now we have a wallet to go out and spend across much more of a global market and what do we get back for that … technology perhaps? So the question for us as CFOs is what's going to be our strategy and maybe being part of Europe has made us look more internal than external.”

Our Chair then posed the final question “In the event of 'no deal' what have your businesses or sectors already done to prepare for or mitigate against no deal as you see it?”

Andrew from Hitachi Capital said that they've reacted very simply and opened up a subsidiary in Europe so they can trade locally but it's costing them; impacting on profits, on funds they could be investing elsewhere.

We're a huge importer of product, that's largely been from Europe but now we have a wallet to go out and spend across much more of a global market.

Jamie at LaSalle believes not many businesses have done much by way of preparation because of the uncertainty, “You could go down route A but then have to reverse and go down route B and that could be wrong too….things like that are really heavy from an investment perspective and people don't have the confidence that it will happen soon so it is a potentially huge expenditure for it to be just dead cost.”

Another CFO in FMCG mentioned that what they've already done is renegotiate contracts with distributors especially those in Northern Ireland and the Republic of Ireland and built in flexibility, on both sides. They've proactively done that and purposefully written wording that means they can revisit areas that need tweaking depending on the deal.

Andrew summed up that business is going to do the things that don't cost very much and aren't going to break your business model. He continued by saying that “Part of that presumption is that if there is a no deal it's actually not going to be world ending. If we do fall off that cliff, then pragmatically, we'll just extend and pretend for a period of time …. Nothing changes and in effect if something different happens then there's a problem.”

The CFO of British Business Bank, Chris Fox said that “For us it's had a transformational effect on our business already and the reason for that is that the largest participants in our market are the European institutions who stopped investing in the UK a while back. We've more than doubled in size so we're able to provide the investment capacity for small businesses in the UK. For us, no deal means we probably need to do more ….and we will grow even more the worse things become. This is because there will be more need for our support into the economy. We're planning on growth and the amount we need to grow will depend on how bad the economy gets.”

Conclusion
Generally, whatever the outcome, our guests were excited about the opportunities that will exist beyond Brexit, but whether you're a Brexiteer or a Remainer everyone's saying the same thing, enough is enough “Just get on with it now!” and in the words of one of our guests, the worst thing is the continuous series of short term delays because the “circus will just continue.” We need to let UK plc get on with what it exists to do - business!

Perhaps our Parliament should take heed of the words said by General Patton….“A good plan executed now is better than a perfect plan executed next week.”