Brexit: Prepare For A Confrontation

UK PM Theresa May has survived the confidence vote triggered by her own party. A further proposed House of Commons confidence vote is also destined to be defeated. However, PM May’s continued premiership does not mean there will be no change in Brexit tactics. She faces the same unresolved conflicts as before. In order to deliver her deal, she may shift towards a more confrontational position with the EU in order to obtain increased leverage. Investors should not confuse this with actively seeking a no-deal Brexit. However, the road to amending the Withdrawal Agreement and winning UK Parliamentary approval now seems paved with market volatility. While UK markets are now trading at valuation levels which discount a significant degree of Brexit disruption, declining earnings forecasts in both the eurozone and UK suggest that it is too early to materially increase equity exposure to these markets.

The focus seems to have shifted away from any renegotiation of the current deal, as no flexibility has been forthcoming on the EU side and towards making preparations for a no-deal Brexit. The strong voices of protest against such an outcome from the corporate sector suggests many do not realise that it may be a tactic.

Having resisted this path for two years, the UK government may now wish to present Parliament and the EU, but not the UK electorate, with two options – an orderly no-deal or an amended Withdrawal Agreement. In our view, it remains unclear at best that an orderly no-deal can be delivered with effectively only 15 weeks of preparation, even if Britons have shown enormous resourcefulness at other historic times of national emergency. Belatedly perhaps, PM May has realised that unless she has a credible threat of no-deal the prospect of any renegotiation of the current Withdrawal Agreement is non-existent.

At this point, we would also note again that only relatively minor changes to the wording of the Withdrawal Agreement would address most, if not all, Parliamentary opposition which arises from quite proper objections in respect of principles of sovereignty and the integrity of the UK. That these changes have not been readily agreed by the EU to resolve the stalemate only serves to highlight the high private value the EU places on them.In particular, this includes the implicit weakness of the UK’s negotiating position for any future relationship which has been clearly embedded in the current deal.

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