Investment Strategies

BREXIT COUNTDOWN: Parliament Votes - Wealth Management Reactions

Tom Burroughes Group Editor London 31 January 2019

BREXIT COUNTDOWN: Parliament Votes - Wealth Management Reactions

Votes by MPs this week sought to keep open the prospect of a negotiated deal. A bid to stop a "no deal" Brexit was defeated, and that outcome remains a possibility. Wealth managers ponder the implications.

Late on Tuesday this week UK legislators voted against an attempt to prevent a “no deal” Brexit (in which the country would leave the European Union without a free trade deal, relying on terms of the World Trade Organisation). Uncertainty about what sort of Brexit deal the UK will get continues to worry the wealth management sector. The UK is due to leave the EU on 29 March.

In reaction to the parliamentary actions, here are comments from the industry. 

John Barrass, PIMFA’s deputy chief executive
PIMFA continues to reiterate strongly that a "no deal" situation should be avoided. We view the transition arrangements enshrined in the draft Withdrawal Agreement rejected by Parliament as being the minimum necessary to allow for smooth changes and a one-step Brexit, as required by our members and for which we have argued persistently for a long time. This will allow the firms to make appropriate alterations and develop suitable strategies post-Brexit to help their clients plan for their financial futures, ensuring minimum disruption and maximum continuity to the essential services the firms provide to help individuals and families.

Geoffrey Yu, head of UK investment office, UBS Global Wealth Management
We continue to see, as indicated this evening, that there is a majority for preventing no deal, yet this scenario remains the default position. The market was clearly not cheered by a result that legally keeps no deal on the table, given that sterling has responded by surrendering some of its recent gains. Investors would have appreciated a more conclusive view on rejecting such an outcome. All eyes will turn to the EU as the question now becomes what is achievable in new negotiations. As things stand, an extension is not entirely unthinkable.

Terence Moll, chief strategist at Seven Investment Management
On the surface, the possibility of a no deal Brexit has risen. Even if it is an outcome that Parliament has rejected, as we get closer to 29 March no deal becomes less unlikely, if only by mistake. To make matters worse, the Prime Minister has promised something she claimed was impossible a few weeks ago – renegotiation of the Withdrawal Agreement. Meanwhile, the EU instantly rejected reopening negotiations.

In reality, the spread of outcomes remain as wide as ever. For starters, Parliament feels it should have been able to give a steer to the government long ago. It is finally learning how to flex its muscles on Brexit. Better late than never. Also, this was an opportunity to patch up a brewing civil war within the Conservative Party while allowing Labour more space to not make a decision. Think temporary “win-win”. But as we get closer to the March deadline, there will be less space for this kind of indecision.

“The Prime Minister has promised another Commons vote in mid-February, possibly on the 14th. What exactly might she bring back to the table? Behind the EU’s bluster, it's an expert at kicking cans down roads. If the UK thinks the way around an indefinite backstop is some technological solution at some point in the future, maybe the EU might be open to agreeing on what kind of parameters it would expect these solutions to meet. (An example is explained in more detail here.) Such parameters “could involve test runs, agreed levels of border security (such as maximum levels of smuggling) and milestones for building the necessary infrastructure for behind-the-border controls.” It’s a long shot but we shouldn’t reject the idea of an updated Withdrawal Agreement.

“In the past month, the currency markets seemed to agree with our view that a consensus was building around taking no deal off the table. The trade-weighted pound has moved up over 4 per cent. Last night’s (Tuesday’s) events haven’t moved the market’s thinking by much. We still think that no deal won’t happen but can’t rule it out yet. We remain overweight the pound in the belief that Brexit won’t be disastrous but are not yet ready to position for a sustained rally in UK equities so remain underweight."

Charles Hepworth, investment director at GAM
After Sir Graham Brady’s amendment – to try and re-negotiate the Irish backstop with alternative arrangements even though the EU has ruled that out – sneaked through with a slim majority, it is back to a game of chicken with the EU, in a bid to try to re-negotiate something that has already been agreed. You could not make this up – essentially May has been told to not allow a no deal outcome at the same time as being tasked with a doomed re-negotiation that risks a no deal outcome.

Judging by the reaction of sterling to the voting outcome – which fell by 0.6 per cent against the US dollar – the odds of a no deal outcome have somewhat risen. In our view, this is all becoming exceptionally tedious. May’s original deal will likely come back to the House unaltered and the choice will then be between that or a no deal Brexit. As uncertainty prevails, UK assets are almost impossible to trade.

Bethany Payne, global bonds portfolio manager at Janus Henderson
The pound retreated as hopes of an extension to Article 50 were slashed. On Tuesday 29 January, Parliament voted against taking control of Brexit proceedings for at least the next two weeks as Parliament failed to support the Cooper Boles amendments [to block a no deal Brexit]. Theresa May must now return to Brussels on a wing and a prayer to renegotiate the Irish backstop.

Currency markets reacted negatively as this is currently seen as an impossible task. The EU aren’t seemingly willing to re-open the Withdrawal Agreement and the so called UK ‘Malthouse Compromise’ for a facilitated customs union and technological solutions to avoid a hard border in the island of Ireland would continue to just be a re-run of previous unsuccessful negotiations. While a no deal scenario is still unlikely, these developments increase the risk of accidentally leaving the EU without a deal and plans may intensify from both sides to manage that outcome.

The successful Brady/May amendment did, however, provide much requested clarity to the EU that there is a majority in the UK Parliament for the Withdrawal Agreement if there is an agreed alternative arrangement to the Irish backstop. This leaves the ball in the EU’s court to choreograph a revised deal that would guarantee support in the House of Commons. If, however, “nothing has changed” in two weeks and there is a failure to have a revised deal ratified by 13 February, then MPs will have another opportunity, on 14 February, to vote to gain control of the Brexit process. An extension of Article 50, to allow time to pass legislation, also now seems increasingly likely.

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