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Brexit and beyond the UK

02 April 2019

Jonathan Marriott, Chief Investment Officer

After a series of twelve 'indicative votes' and three 'meaningful votes' on the deal offered by the European Union, nothing has passed. It is clear that MPs do not want a no-deal Brexit; however, what they are prepared to accept remains unclear. As I write, ministers are gathering for a five-hour cabinet meeting. 

It is important to remember that the rest of the world is not as obsessed by Brexit as commentators in the UK. Cabinet ministers are split down the middle, with nearly half said to favour a no-deal Brexit. The Chief whip commented that this was the most "ill-disciplined" cabinet in history, which makes predicting the outcome of today's meeting hard and predicting the way forward even harder. It appears that a combination of a customs union and a second referendum may eventually command a majority in Parliament, but this is far from certain. This would involve asking for a further delay to the UK's departure from the EU and as a result, the UK would have to participate in the upcoming European elections.  Without a deal or a proposal for a delay, the legal position is that the UK will leave at the end of next week on April 12th.

If the final outcome results in a softer Brexit, conventionally one would expect the pound to rally. Equally, if the outcome is a hard Brexit, the expectation is that the pound will fall. It is worth considering that this may not be quite so black and white. A falling pound generally benefits sterling based portfolios as the UK equity market, which is dominated by international companies, would be expected to rise. All other things being equal, the reverse is true. A settlement in the Brexit question could see international investors return to the UK, offsetting any weakness due to a stronger pound. The fly in the ointment for this argument is that if a softer Brexit comes about, it may well split the Conservative party. If this happens, the probability of a Corbyn lead Labour government could rise which would be likely to be seen as negative for the pound. Thus, the picture may be more balanced than it appears at first.

While Brexit dominates discussion here and there seems to be little else going on as far as the UK press is concerned, there are other matters that are of much greater concern for international investors. Notably, the prospects for interest rates, Chinese economic growth and the US China trade dispute. On these issues, there has been incrementally better news, with purchasing manager data in the US and China beating expectations this week. The Federal Reserve has said that quantitative tightening is coming to an end and further rate rises are off the cards for the time being. On trade, there are positive signs and the additional tariffs that had been threatened by President Trump are on hold. These positive factors have supported equity markets so far this year.

We remain concerned about Brexit and the impact on the domestic economy, but taking a global prospective, there are many reasons to maintain a positive outlook.