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Will we have another Brexit Referendum and what market impact could it have?

20 July 2018

Will we have another Brexit Referendum and what market impact could it have?

The original Brexit vote split both the two main political parties and continues to do so.  Theresa May's Chequers plan for Brexit has found critics on both the 'Remain' and 'Leave' sides of the debate.  Some politicians have suggested that the electorate is not qualified to make such an important decision.  If the misinformation put forward by both sides in the debate is an indication of politicians' understanding, then one could argue that it is in fact better left to the electorate. 

The scare tactics from the Remain camp on an immediate budget and job losses has proven ill founded; unemployment today is the lowest it has been since the 1970s.  Equally, the savings emblazoned on the Brexit bus and the benefits to the NHS are unlikely to come to fruition.  Even our capacity for trade deals outside of the EU is looking challenging with President Trump's apparent to-ing and fro-ing.  In addition, there was little mention of the Irish Border issue at the national debate by either side outside Northern Ireland.

As it stands, I have been able to outline three realistic possibilities: to remain in; to accept a compromise agreement, as suggested by the post Chequers white paper; or to leave with no agreement and fall back on World Trade Organization rules. It is hard to see any of these options getting a majority in parliament and calling a general election would not change this, nor would a Conservative leadership challenge. The parliamentary numbers are hard to weigh up with The Times this week identifying fourteen different factions on Brexit. Justine Greening suggested a referendum with three options and a first and second preference voting system would be the only workable solution.  Whilst this is an unfamiliar way to vote, it could be argued as one way to get a conclusion when the vote is split multiple ways. 

When looking at the outcomes, let's consider the recent white paper as the basis of the middle ground. This has yet to get approval from the European Union and is unlikely to do so without considerable amendment.  Whilst free movement of people and the ability to do trade deals outside the UK appear to be the main sticking points, the document envisages new arrangements and organisations on almost every page.  The access of financial institutions to the European market is a major concern. The City and finance sector are a significant source of the UK's tax revenue and damage to this sector could result in a large dent in the UK's budget. A dent that would be hard to fill. On the other hand, a free flow of goods from the EU into the UK should be positive for EU negotiators given the trade surplus they enjoy relative to the UK.  Assessing the market impact of this option is challenging given the uncertainty about its final shape, however a compromise would probably be seen as positive for sterling.  Whilst a strong pound is poor for UK stocks with overseas earnings, this effect may be offset by the return of investors that have shunned the UK while the Brexit uncertainty was hanging over the market.  A vote to reverse the referendum and remain in the EU is likely to be greeted in a similar fashion. 

If we were to depart from the EU with no deal at all then we should expect further weakness in sterling, which would support the overseas earners and see the FTSE 100 Index move up.  In the short-term, manufacturing dependent on the free flow of goods would be severely impacted.  No doubt, in the long-term, as new trading arrangements came about and with the lower pound helping the competitiveness of the UK, some of these effects may be reversed.  Any potential rate rises from the Bank of England would be postponed, supporting short dated gilts.  Longer dated Gilts may suffer from supply concerns as tax income is reduced and borrowing increases.

As it stands, the Prime Minister has ruled out another referendum and, in any case, there seems little point in holding one until the shape of a compromise deal is a lot clearer.  If the decision was made that another referendum would take place, at least then there could be no claim that the UK population had been misled or gone in blind. It would undoubtedly be at least as divisive as the previous vote, but the electorate would be better informed and more wary of the politicians' promises and threats. Whilst a second referendum seemed a remote possibility, it is becoming more of a possibility daily and the odds on it taking place have shortened from 20-1 against to just 5-2 this week.  In any event, time is getting short and a resolution by the end of October is needed to get ratification by the end of March 2019.  The full impact of our new arrangements may not be felt until the end of the transition period in 2021.



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