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Do the votes in Parliament change the course of Brexit?

18 January 2019

For many of us, it has been clear for years that the issues around Brexit cross party lines, with both the Conservative and Labour parties split into multiple factions. As May said after the proposed deal was voted down, it tells us what Parliament doesn't want, but tells us nothing about what it does want. The subsequent no confidence vote was equally uninformative about the way forward, since all it told us was that the Conservatives and Democratic Unionists do not want Jeremy Corbyn as Prime Minister.   

The penny has finally dropped for the Prime Minister and she is seeking to consult across party lines.  Her invitation has been accepted by all the smaller party leaders, but Corbyn is persisting with a game of party politics in an attempt to split the Conservatives. Blair commented this morning that "if in a moment of crisis the PM asks the leader of the opposition to go and talk he should go and talk". Without winning round the hard Brexiteers  in her own party or a share of the Labour party, she will find it difficult to get anything done. As I write, Corbyn is still saying he wants an election despite the failure of his no confidence motion. However, if the front bench of the Labour party will not talk, its backbenchers appear to be more flexible and are scheduled to meet the Prime Minister. So far, these meetings appear to amount to little more than an exchange of views and would require the Prime Minister to abandon some of her red lines to get an agreement. Backbench Labour MPs may be persuaded to back a deal if workers' rights are better protected. Getting a deal done with support from opposition parties may however deepen the divide within May's own party. We may know more when the PM makes a statement to the house on Monday but for now, there is nothing new.

Looking at the various outcomes is complicated, with the possibilities ranging from a "hard" exit without a deal on World Trade Organisation terms, through to remaining part of the European Union. In Parliament, there is a vast majority against a hard exit and yet this is what happens as a result of the Article 50 regulation if there is no other agreement. Corbyn wants this ruled out but it was part of the legislation when the Labour party voted for Article 50, therefore cannot be ruled out without an agreement. It may be argued that leaving this on the table keeps pressure on the EU to agree a trade deal, after all the rest of the EU sells more goods to the UK than the other way round. When we do finally have clarity on the final deal, the route to that outcome may also impact the market reaction, particularly if it involves a Labour government or a split in the Conservative party.

When managing portfolios, we can look at the range of outcomes to gauge market reaction. In a hard Brexit, the pound would be expected to fall which would increase the earnings for international stocks listed in London. Those stocks which are more dependent on the UK economy would be expected to fall. The exact reverse would be expected from a softer Brexit deal. However, if a deal was achieved in a way that led to a Labour government then a weaker pound and higher gilt yields could be expected. While some stocks with overseas earning should benefit from the pound falling, those subject to threats of nationalisation would probably fall. If a second referendum were to be called, we would expect the result to be as close as it was before. Markets would no doubt swing on opinion polls but the big reaction would only come after the result. Many of the softer Brexit options would involve a delay in leaving the European Union beyond March 29th.

Making investment decisions based on a particular view of the outcome is dangerous. However, getting rid of the uncertainty in almost any way could eventually lead international investors to take a fresh look at investing in UK listed stocks, which have been unloved for an extended period. A FTSE 100 dividend yield of 5% and a price earnings ratio below 12x should, in the long run, be attractive. In the short run, volatility will continue as speculation about the fate of Brexit continues. Amidst all the talk about Brexit, we should also remember that the moves in the final quarter of last year had little to do with Brexit and more to do with trade and tightening monetary conditions globally. While a hard Brexit on the 29th of March is still possible, the more likely ways forward could include a delay or an extension to negotiations of the future trading relationship which would prolong the uncertainty.




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