Brexit Update: What now?
New Update! Monday 19 November 2018
2) Change of PM by vote of no confidence in the conservative party: A vote is increasingly likely after Jacob Rees-Mogg ‘s move to ask for a no confidence vote. It would require over 165 MPs to support Ms. May’s ouster, significantly above the 48 required to trigger the vote. If Ms. May survives this –and she probably would- she would be in a stronger position within her own party, but it still does not shield her from a parliamentary No Confidence vote, whose outcome depends on the DUP.
3) Change of government by No Confidence vote: If the DUP or a few conservative MPs don’t support the government in a No Confidence vote, then the government falls. The key here is the 14-day rule. If the government cannot secure support within 14 days only then is the election called. This scenario is popular with Brexiters who believe they can trigger the process to cause the government to fall with significantly less than 165 votes, replace Ms May within 14 days and then garner party support to win parliamentary confidence, including resurrecting the deal with the DUP. This outcome is currently unlikely and chances are that a No Confidence vote would eventually lead to a new general election.
4) Go back to the table and renegotiate: The problem with this approach is that the No-Deal option would hurt the UK more than it would hurt Europe, especially given the looming deadline for Brexit. The UK’s sole card, the refusal to disburse the £39B Brexit Bill could have serious legal implications, since this is money already agreed and signed for in previous treaties.
Update: Thursday 15 November 2018
Yesterday’s initial Brexit deal is a small step in a long road towards a post-Brexit Britain. The deal proposal addressed two easy issues, the settlement of Britain’s exit bill to the EU, and the regulation of citizens’ rights on both sides. It also provided a compromise on a difficult one, the Irish border, one that would let the UK keep its territorial integrity and avoid a hard border in Ireland, but also provide the EU with a guarantee it needed it would not unilaterally renege on the deal. For the deal -seen by some MPs as a capitulation- to gain any momentum, it needs to clear a very divided parliament.
What does this mean for investors? For the moment, very little. If the parliamentary hurdle is cleared, a prerequisite for a Brexit “transition period” until January 2021, it would be positive over the shorter term, as it extends the current period of stability for two years. Currently, we believe the chances of not passing are even, especially after the resignation of newly appointed Brexit minister Dominic Raab.
Passing of the bill would also put the train on its tracks towards an amicable negotiation on what the future trade relationship with the EU looks like. The deal, however is a milestone, not a solution. It does not address the main issue for investors, which is clarity on what post-Brexit Britain looks like. As far as the City is concerned, the document proposes access under the so-called “equivalence” regime, a system that lets firms from non-EU countries deemed to have similar financial regulations do business with the bloc. It is less than the benefits of full membership and subject to Brussels’ interpretation. The document also does nothing to reduce the increasing polarisation in the country and parliament , which is already constraining policy decisions and -ultimately- slowing the economy. As long as this is the case, we don’t expect global portfolios to increase their long-term position in British domestic assets.