Since U.K. Prime Minister Theresa May said that "Brexit means Brexit", confusion has reigned among business people and investors about what exactly that means. Investors are beginning to see at least some of the general lines of the government's position.
On the basis of what has been made public so far, it looks like investors should brace for a "hard" Brexit -- the kind of Brexit that ends U.K. access to the single market. Of course, these are still the early days, and things can change.
Perhaps the most telling sign of a "hard" Brexit stance so far is the fact that May, while rejecting a points-based immigration system that would take people in based on whether or not they meet a certain score, said the government would definitely want to impose limits on immigration from the European Union.
The EU has insisted on freedom of movement for its citizens in exchange for access to the single market, therefore this stance forfeits U.K. access to the world's biggest trading bloc. Some pro-Brexit business people are saying this would not be a tragedy.
Tim Martin, chairman of pub chain J D Wetherspoon (JDWPY) , wrote a lengthy criticism of the EU and called for the U.K. to leave without a trade deal in today's release of interim financial results. He called the EU "an organization of Byzantine complexity, run by five unelected presidents, with input from numerous other parts of the many-headed Hydra."
"Common sense ... suggests that the worst approach for the UK is to insist on the necessity of a 'deal' -- we don't need one and the fact that EU countries sell us twice as much as we sell them creates a hugely powerful negotiating position," he said.
Sounds simple, but in fact it's a matter of interpretation how powerful that position really is. In absolute terms, yes, British exports of goods and services to other EU countries were worth £220 billion ($292.4 billion) last year, while exports from the rest of the EU to the UK were indeed higher, at about £290 billion ($385.5 billion).
However, if we look at this in terms of percentages, according to data from the U.K.'s statistics office, the EU buys almost half of Britain's exports, while the U.K. takes in around 7% of all other EU countries' exports. Like everything to do with Brexit, it's not that clear cut that the U.K. does have the upper hand here.
It is possible that the pub chain itself would not suffer much if the U.K. does indeed opt for a "hard" Brexit and leaves without access to the single market. It operates venues only in the U.K. and might benefit from an influx of tourists attracted by continuing weakness in the pound, so it could be among the winners.
Another company in the leisure industry that could benefit from a hard Brexit is Whitbread (WTBCY) , the parent of extremely successful chain Costa Coffee and ubiquitous hotels Premier Inn. Unlike J D Wetherspoon's top representative, however, Whitbread's management is worried about what a Brexit would mean for business, because of the possible negative effect on the consumer.
By contrast, the worst hit will be the banking industry. U.K. chancellor Philip Hammond promised that immigration controls would not apply to EU bankers seeking work or working in London. This after Japanese companies have expressed concern about the effects of Brexit and banks have put pressure on the government to try to dispel some of the post-vote uncertainty.
Freedom of movement for bankers is nice to have, but without an agreement on freedom of movement for all EU citizens, banks and other financial services companies based in the U.K. are likely to lose their two key freedoms. These are: the "passporting" right that allows them to do business anywhere in the EU, and the right to clear euro-denominated deals.
These two key freedoms mean a lot. The fastest growth in British services trade has taken place in its relationship with the EU, according to a report by the Center for European Reform, followed at some distance by trade in services with the U.S. and the big emerging markets. So investors could count the big British banks such as HSBC (HSBC) , Barclays (BCS) , Lloyds (LYG) and Royal Bank of Scotland (RBS) among the losers, as a "hard" Brexit seems to shape up.
Details of the talks are sure to emerge in the following months, and investors should keep an eye on them as they could open buying and selling opportunities.
