Brexit Update: Script Playing Out As Expected

18 Mar 2019

Terence Moll, Chief Strategist

What happened?

You cannot be serious! Let’s ask the Brexit Secretary Steve Barclay for guidance. "It’s time to put forward an extension that is realistic," he said at the dispatch box. Minutes later, he voted against it.

While we’re no clearer on the outcome, there has been some progress. Businesses and financial markets will be relieved to know that the UK political classes are not total kamikazes. More specifically, the last month has seen a series of Brexit taboos broken. First, Theresa May has bowed to what we have long argued is inevitable – the UK will kick the can down the road, most likely by extending Article 50. Second, May also conceded that No Deal will be a political decision, not simply a legal default. May is famous for saying, "No Deal is better than a Bad Deal." The last few weeks suggest she thinks otherwise. And finally, following months of refusing to back a second referendum, Jeremy Corbyn has conceded that this is Labour’s only remaining option outside another general election.

“Theresa May has bowed to what we have long argued is inevitable – the UK will kick the can down the road.”

What next?

An extension request is inevitable. How long will it be for? Parliament will decide on these points next Wednesday (20 March 2019). May will have one last chance to put her deal forward: If it passes then there will be a short extension to dot the i’s and cross the t’s; if it fails, a longer extension is possible because in the words of Donald Tusk, "the UK needs to rethink its strategy." Otherwise, the extension will resolve nothing substantive.

The 2016 referendum answered the "what?" – Leave the European Union (EU) – but not the "how?" or "why?" Attempts by politicians to answer these questions have caused the current crisis. Until these questions are resolved, all options are still on the table … from an exhausted Parliament eventually passing May’s deal as the clock ticks towards midnight to some form of soft Brexit agreed on cross-party lines. A further extension looks the most likely option but a delayed, mid-summer No Deal is possible, particularly if the EU refuses to grant a long extension. We could even see a second referendum, though this looks unlikely.

Portfolio implications?

Business investment in the UK has already stalled and will remain subdued, while Sterling will drift in its Brexit-uncertainty range. It’s currently at the top-end of the range as the near-term possibility of a No Deal Brexit recedes. But until this is off the table, markets will struggle to push the Pound much higher. We remain overweight GBP vs. our strategic asset allocation as the Pound remains cheap relative to history. We continue to believe a softer Brexit is the most likely outcome – though have no idea when this might materialise.

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