Share Prices & Company Research


15 November 2018

Brexit Deal: Where do we go from here?

Having initially secured the backing of the cabinet for her Brexit deal last night, Prime Minister Theresa May now faces a fight for survival following the high-profile resignations of Dominic Raab and Esther McVey as well as a number of other MPs. Jacob Rees-Mogg has followed through on a previous threat and submitted a letter to the chair of the 1922 Committee calling for a no confidence vote. As investors respond to the ongoing political developments, two key question arise: what are the likely outcomes given the deal on the table? And how will this influence the UK market?
Should Mrs May survive the possible leadership contest, her biggest challenge still awaits as to whether she will be able to push this deal (or indeed any deal) through Parliament. The PM appears to have lost the support of the Democratic Unionist Party, as the Northern Irish Party who propped up the Conservatives’ minority government following the snap general election have branded the draft treaty as a “betrayal”. Opposition leader Jeremy Corbyn has insisted that the deal on the table does not meet Labour’s “six tests” and has said his party will vote down any deal that fails to do so, while former Foreign Secretary Boris Johnson has urged eurosceptics in the cabinet to stage “mutiny” against the treaty, with the early high-profile resignations stated above expected to encourage more to follow.
The PM, for her part, has urged her party to accept compromise and pleaded that critics do not force negotiations back to “square one”. On the face of it, the possibility of the treaty gaining Parliamentary approval may appear unlikely, however, although the deal may not be voted through the first time, there is scope for the treaty to move back and forth, adding finer details to appease both sides. The Conservatives will also be mindful that voting against the PM raises the risk of a second referendum and/or a general election, where the outcome of either is very far from certain.  
This leaves three probable outcomes: the first is that the treaty eventually gains parliamentary approval and the negotiations on the final terms of the UK’s divorce from the EU begin. The danger of this outcome is that the UK may become stuck in a never-ending process as any divorce terms will require full EU approval. As a result, markets may remain in limbo, reacting sheepishly to any developments, as has been the case since the referendum.
The second outcome is, following a second referendum, the UK remains in the EU as a full member of the customs union. This would lead to a strong rally in sterling providing significant tailwinds for UK domestics, whilst a stronger currency may damage UK-listed multi-nationals, increased investor confidence would improve wider market sentiment.
James Andrews, Director – Head of Investment Management, said: “The final outcome is that, following a general election and/or second referendum, the UK leaves the EU on ‘No Deal’ or ‘Hard Brexit’ terms. Sterling would likely depreciate further from current levels as confidence in the UK economy fells, generating headwinds for UK domestics as import prices rise. This would equally generate tailwinds for UK multinationals with international revenue streams, although they may be damaged by wider negative sentiment on the UK economy.
“What we do know, at this present time, is that there continues to be a great deal of uncertainty, which markets do not like, given they are attempting to accurately price in future returns. The volatility is here to stay at the very least until we get past the vote in Parliament, which is pencilled in for the week beginning 10th December. In the meantime, we expect UK mid-cap stocks to remain under pressure along with a very volatile UK Pound.”
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Brexit Deal: Where do we go from here?
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