“The U.K. remains wholly split,” says European Strategist Chris Bailey, “and time is running out.”
An observer dropping into the Brexit debate for the first time this morning would probably conclude that the relatively benign overnight performance of both the pound and U.K. equity market implies recent events have not really mattered.
Tuesday’s humiliating rejection of the carefully crafted Brexit compromise deal agreed to by U.K. Prime Minister Theresa May and the continuing EU would, under any normal circumstances, be followed by a prime ministerial resignation. However, in another indication that these are not normal times in the U.K., the chances of this – or even the U.K. government losing today’s upcoming Parliamentary vote of no confidence put forth by the lead U.K. opposition party who are attempting to force a new general election – are low. Certainly there was significant short-term political expediency in yesterday’s voting, but the magnitude of the defeat does not represent the median U.K. populace or Parliamentary view of a Brexit solution.
The U.K. remains wholly split on Brexit, and time is running out, raising the spectre of a disorderly “no-deal” reality where trade is potentially significantly disrupted with significant knock-on effects to both U.K. and continental European economic growth rates at a time when neither can afford this. Fortunately, saner heads appear to be at work, and certainly the average Parliamentarian view is in favour of a “soft” Brexit – i.e., maintaining a closer relationship with Europe than even suggested by the failed Brexit deal. The question is how to get there.
Since the vote, there has been talk of deadline delays to the important Article 50 withdrawal legislation, which potentially could be delayed from the current end of March deadline to the end of June or maybe even later. This would take away some shorter-term pressures and fears of a disorderly exit, but it still does not answer the question about the way ahead.
There is growing support for a second referendum, although precisely what Brexit options would be offered is unclear. It would likely offer more than just a binary “leave” or “stay” option, reflecting the many shades of grey in the future U.K./EU diplomatic, trade and security relationship. New cross-party talks are certainly likely to focus on at least an ongoing close relationship, an outcome which is likely to be broadly acceptable to the EU, who would prefer the U.K. not to have initiated a leaving process in the first place.
In short, multiple options from “no deal” to “no Brexit” still exist, but the most likely is a cobbled-together compromise. This scenario would improve the opportunity set around U.K. assets, including the British pound. Global fund manager positioning in U.K. equities is at very low levels, judging by survey data out earlier in the week, and any deal that avoids a no-deal final outcome should benefit U.K. stocks, particularly those in industry sectors with greater domestic revenue and profit focus. However, to get to this point, some forging of a new plan needs to be made. Brexit is not going to leave the front pages any time soon.
Raymond James Euro Equities is an affiliate of Raymond James & Associates and Raymond James Financial Services.