Brexit has dominated British politics for the last two years, but with less than four months to go to the date of the UK’s departure from the European Union on 29 March, it continues to be a source of great uncertainty.
The referendum result showed the UK electorate was split down the middle on the issue and any “solution” is likely to be unacceptable to a significant minority. The ill-judged and inconclusive election in June 2017 left the Tory government without a clear majority or mandate to negotiate with and the EU has shown little inclination to make the UK’s exit anything other than painful.
Whilst it is still very unclear what form Brexit will take we have attempted to assess the implications of a number of possible outcomes. The most likely include
1. Theresa May’s compromise agreement passes through Parliament
2. There is no agreement and the UK suffers a hard, or unmanaged, Brexit.
3. A re-negotiated agreement, or new referendum, or no Brexit at all.
The first of these would probably be the most positive option for investment markets. Businesses could continue to trade and shares in the EU and UK, which have been significantly down-rated by global investors, could perform well. Events of the last few weeks have made this highly unlikely as an opportunistic coalition of opposition and rebellious Tory MPs appear determined to object to the proposal despite failing to offer a plausible alternative.
If the UK leaves the EU without an agreement, we would expect reduced economic growth or a recession. Sterling would probably fall, and stock markets would be volatile until new trading arrangements were agreed. In this instance we would expect your global and UK equity funds to offer some protection against currency movements. If Sterling falls the value of your global equities are likely to rise to take account of the “increased” value of their foreign assets. FTSE 100 companies should therefore offer some protection as a large proportion of their revenues are derived outside the UK.
The third option is the hardest to assess. The EU is unlikely to have much appetite to offer further concessions to the UK. Some pro-European MPs have suggested that Article50 is withdrawn and that the UK remains within the EU, but this would fly in the face of the referendum result. Similarly the constitutional basis for another referendum appears weak and there is no guarantee that it would produce a definitive answer.
From an investment perspective the most damaging aspect of continuing Tory party infighting is that it increases the possibility of an early general election, with the risk of a Labour/SNP government with an anti-capitalist agenda. Whilst we believe this would be a very negative outcome for investment markets and the UK economy we do not believe we are at a point where this should form the basis of our investment decisions. If circumstances change we will reassess this risk.