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Brexit ‘What ifs’

29th November 2018

The only thing we know for certain currently is that something will happen by 29th March 2019. It seems we have three broad outcomes at that point (though these could of course lead to many more long term options):

• No deal exit from the EU
• Entering the negotiated transition period/deal agreed in Brussels
• Kicking the can down the road – extension of article 50

It would be a bold move indeed to make a firm prediction as to which will come to pass. But we can at least understand the paths needed for each of the outcomes, and to a lesser extent understand what we can expect from markets in each case.

No Deal

A no deal exit requires the UK parliament to vote against the government and then one of many different routes, each meaning we do not extend article 50, or enter an exit deal before the 29th March. The first step of these various paths is looking more likely, although this path could well still close in December. A no deal is in the view of most industry experts, political commentators and economists close to a disaster scenario for the UK. Unless the government has been doing much more preparation behind the scenes it seems we’d see significant impacts almost immediately in importing and exporting, many supply chains and potentially many other areas of the economy. How much the impact will be of a no deal is hard to gauge but we would not be surprised to see a big hit to the pound against other major currencies as a first response from the markets.

Mrs May’s deal

Should parliament agree the government’s exit deal we would enter a transition period which would at least remove the prospect of an imminent cliff edge for businesses. However, this is far from the last we’ll hear of Brexit. The next negotiation stage would then begin, although under the new background of an agreed ‘backstop’, providing a default end state for the UK. Amongst the various views on Brexit as a whole there seems to be an even wider range of views on this ‘deal’ and on the agreed backstop. But given very little would actually change overnight it’s hard to interpret how markets would see this outcome. Common sense would suggest that by removing the ‘no deal’ worst case scenario from the table this outcome should at least remove some of the immediate uncertainty from markets and potentially lead to a small boost for the pound and UK markets.

The fudge

This third and final outcome for March 2019 can only be reached by the trickiest path. For us to have anything other than the two outcomes above something as yet unforeseen needs to happen. The most likely route is the decision to have either a second referendum or a general election, though this would seemingly still require some sweet talking of the EU27 to allow us to extend the article 50 period. Should we somehow end up in the exact same position as today come 30th March there would be some positives and negatives. On the positive side it likely means we have something concrete on the horizon (a new vote or an election) and also shows that the EU27 have not completely washed their hands of the UK just yet. On the negative side, it means a much longer period of uncertainty and realistically a big loss of political capital in our negotiation position with the EU27. Depending on the noise from Westminster this could also be a path to no Brexit at all – though with every day that passes this seems less and less likely to be an outcome (particularly to those familiar with the sunk cost fallacy).

It would be a brave soul to try and pick a winner in this particular race. The most surprising thing is that none of these three outcomes seems particularly unlikely at this crucial point in the process.

We continue to monitor this and other situations and position the portfolios we manage accordingly.

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