Brexit Muddle-Through Towards The Approaching The Confidence Vote
The newsflow concerning Brexit has been quite intense since the UK government was able to secure an agreement with the EU on 25 November 2018. The most notable developments have been:
- 4 December: The “Grieve” amendment, giving MPs more influence regarding the Brexit process if a Brexit deal is voted down.
- 10 December: The decision of the UK government to postpone the ratification of the deal by the UK Parliament as it was bound to fail by a very large margin (a new attempt has been scheduled for 15 January 2019).
- 10 December: The confirmation by the European Court of Justice (ECJ) that the UK can unilaterally revoke Article 50.
- 12 December: The failure of a no-confidence vote held among Tory MPs against PM May. Since mid-December: Various announcements regarding contingency planning measures in case of no-deal Brexit.
Developments and scenarios ahead: The Brexit-related news flow since the UK/EU agreement on 25 November 2018 has been quite intense. In our view, it has slightly increased the probability that the UK remains in the EU beyond March 2019, thus prolonging the uncertainty over how (and even whether) Brexit will happen. Nonetheless, our most likely scenario remains that the Brexit deadline arrives with a ratified deal (60% probability).
Note that this probability covers deals other than the recent UK/EU agreement (as long as they lead to a transition period during which the UK will still be part of the European Single Market) and potentially very rocky paths to deal ratification, which would only come after major episodes of uncertainty and stress.
Investment views: Regarding the markets, at the moment, they continue to price in some sort of weak muddle-through scenario. As uncertainties around Brexit outcomes remain high, sterling will likely continue to be under pressure, with some downside risks remaining (especially vs the Japanese yen), given the increasing probability of no deal. We would return to a more neutral view in a phase of excessive market pessimism.
In fixed income, our view on duration is around neutrality, given two contradictory forces in play: the excessive valuation regarding 10-year real yields (now at -2.15%); and the downward revision of economic growth prospects leading to more a dovish Bank of England. We believe that current market volatility creates opportunities for active managers, but all positions have to be managed actively and even reversed could more positive developments appear regarding the Brexit situation.
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