On Brexit bill defeat

January 28, 2019 12:21
Investors and companies need to prepare for a wide range of Brexit scenarios. Photo: Reuters

On Jan. 15, the UK parliament decisively defeated Prime Minister Theresa May’s bill on the United Kingdom's withdrawal from the European Union, putting a huge spanner into government policy and throwing into doubt the whole outcome of the Brexit process.

But Brexit is not the only geopolitical issue in the world that markets need to contend with. We have enormous trade tensions that have risen almost every month over the past six to nine months and we’ve got significant concerns over China, so investors have plenty to discuss over the next couple of months.

The sheer scale of May’s defeat underlines once more the deep divide among MPs and suggests that achieving a majority for a deal in a potential second vote will remain very challenging – unless we see material concessions by the EU or changes in the government’s position.

Realistically, there’s limited scope for substantive concessions from the EU, aside from cosmetic tweaks to the not-legally-binding declaration on the future partnership. For example, the EU could come up with further non-binding “clarifications” on how to work on customs processing systems for Ireland within a given time frame.

Meanwhile, the Brexit clock is ticking fast, with little more than 70 days until the UK is due to leave the EU. It is hard to see what can be achieved within the current Brexit timetable.

As such, we think an extension to the March 29 deadline is the more likely of potential outcomes. The main question is the basis on which the EU agrees to this extension.

While a “no-deal Brexit” remains a potential outcome, the operational hurdles for a “crashing out” on March 29 have risen following the European Court of Justice ruling that the UK can unilaterally revoke Article 50 and a parliamentary vote giving MPs more control over negotiations.

Looking ahead, we see three key points to consider:

1. Uncertainty persists.

Even if an “edge-of-the-cliff” scenario is avoided, uncertainty will persist given that any agreed withdrawal deal will merely set the scene for the future trade relationship. Therefore, investors and companies need to prepare for a wide range of scenarios.

2. The impact of Brexit will be uneven.

Whatever the ultimate Brexit “end state”, more frictions in trade with Europe seem unavoidable. This will affect EU member states, the UK and its various sectors differently. For the UK, time and active trade policies are necessary to mitigate some losses from higher restrictions to EU trade, but this may not offset them completely.

3. Brexit entails a bumpy ride for UK assets.

But the UK stock market is not the UK economy. Seventy percent of FTSE 100 revenues are generated overseas. The dichotomy between internationally and domestically oriented UK stocks might well continue.

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As Global Strategist at Allianz Global Investors, Neil Dwane is responsible for presenting strategic house views and overseeing the Economics and Strategy Research teams.