This coming week, the British parliament will return from holiday and the divisive Brexit debate is expected to resume.
Ever since the June 2016 referendum, the subject of Brexit has never been far from investor's minds. It certainly was on Warren Buffett (Trades, Portfolio)’s mind when Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) Insurance Group applied to set up a unit in Ireland to allow it to continue to service clients in Ireland and the European Economic Area following the referendum's conclusion.
Before the vote, Buffett said he didn't think it was "a good thing,” but added that it wouldn’t change his investments or business decisions:
“It wouldn’t change anything I did. I wouldn’t sell the farm I own. I wouldn’t sell the real estate I own. I wouldn’t sell my house. I wouldn’t buy a different kind of car. And I certainly wouldn’t change my investment in businesses. But -- I hope they don’t do it.”
With permission being granted last month to set up an insurance hub in Dublin, however, the Berkshire Hathaway Insurance Group has now joined a number of major insurance companies, including BUPA, Hiscox and Royal London Insurance, in either outlining or implementing plans to set up in Ireland in order to retain access to the single market post-Brexit.
So has Buffett and others possibly got it wrong on Brexit? Will the U.K.'s withdrawal from the European Union create more opportunities or be detrimental?
With the political turmoil in the U.K. at a level unseen for a generation (or two) and the EU refusing to budge an inch on concessions, the prospect of a political and economic breakdown over how Brexit is managed is a real possibility. Over the last several months, the prospect of a no-deal Brexit saw the forex trading news dominated by a rise in the British pound-dollar exchange rate and a decline in the euro-pound rate. The markets know. For all the scare stories being thrown around by news organizations, activists and even politicians, if there is one sector that can cut through the chaos faster than a knife through butter, it is the financial markets.
The financial markets factor in just about every possible scenario. When panic levels heightened over a no-deal Brexit and newspapers ran stories on the potential repercussions, forcing Brits to go without medicine, food and more, the markets didn’t panic. Why? Because they know.
The markets know Brexit will be a disruption, but not a catastrophe. As the world’s fifth-largest economy, the U.K. is robust enough to survive (and some dare even say flourish) post-Brexit.
While the manufacturing sector in the eurozone is contracting, it is soaring in the U.K. A 1.1% increase in January was followed by a 0.9% gain in February, making it the strongest two-month average since 2016. Retail sales in the U.K. increased at an average of 0.8% in the first quarter of 2019, while the unemployment rate of 3.9% was the lowest since November 1974 and exactly half the EU's unemployment rate of 7.8%.
There aren’t many people that think Brexit will be free of disruption. While the final details have yet to be thrashed out, the doom and gloom surrounding the deal may be a little misplaced. The deal brings the possibilities of lower tariffs and the opening of new markets. It is fair to say the caution applied by Buffett in setting up in Ireland was the right approach to take. The unwanted "Brextension" only highlights the uncertainty over the deal and the prudence needed to ensure any negative effects are minimized as much as possible, which is exactly what Buffett has done.
While Buffett has been on the record discussing the negative effects of Brexit, he hasn’t exactly waded into the subject at every available opportunity. Instead, what we have seen is a cautious and sensible approach, taking the necessary actions to ensure all bases are covered without causing any major disruptions.
Has Buffett got it wrong on Brexit? Like with most of his businesses decisions, he probably got it spot on.
Disclosure: The author has no stakes in the listed equities.
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