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"Flextensions" And Elections - Fund Managers React

Jackie Bennion, Deputy Editor, 30 October 2019

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With extra time being given for Brexit and a pre-Christmas election, or "Brexmas" now on the cards, some investor reactions.

Monday began as expected with the European Union granting a Brexit extension until 31 January 2020, or earlier if parliament can ratify a deal. Monday afternoon saw Boris Johnson's call for a snap election to break the logjam fail to win a two-thirds majority. By Monday evening, the government had tabled a one-line bill to amend the Fixed Term Parliaments Act that would allow MPs to back an election with a simple majority, with 12 December as the polling day. The Lib Dems and SNP have said they would support the motion if the PM agrees to put his Brexit deal on hold while the electorate weighs in. Labour with little option on Tuesday joined that chorus. Monday's events have certainly put paid to Johnson's "do or die" Halloween departure, easing hard Brexit fears for now. But negotiating the future trading relationship with a transition period currently due to end on 31 December 2020 ensures that the phantom of Brexit will live on well into next year. Below are comments on the impact of the extension on UK businesses and investment, and the spectre of a pre-Christmas general election.

Edward Park, deputy CIO at Brooks Macdonald
“With the news that the Labour party will back calls for a snap general election, sterling has rallied on the hope that a new parliament will provide more Brexit clarity. Whilst the exact timing of an election remains elusive, it is looking increasingly likely that the UK will be heading to the polls in the first half of December. With the EU confirming a flexible extension of the Article 50 deadline to 31 January 2020, it was becoming politically unpalatable for the opposition to resist Johnson’s calls for an election. The outcome of the election will be heavily predicated on what deal, if any, can be reached between the Labour party and the Liberal Democrats. Should the tentative ‘rebel alliance’ move into a more formal electoral pact, there may be a possibility of an upset against current polling which suggests a Conservative majority.

“Should the government bill pass today, likely amended from 12 December to 9 December or earlier, the risk of a perpetual extension of Article 50 reduces which will provide clarity to sterling be it positive or negative. The sword of Damocles hanging over sterling has as much to do with the constant uncertainty as it has to do with the binary outcomes of no deal or soft Brexit.

"The fundamental change over the last three weeks is Boris Johnson’s government negotiating Withdrawal Agreement B as it makes it highly likely that the Conservatives will campaign on the basis of this deal at the next election. With the major parties offering either the proposed deal or a remain focused mandate, the risk of a no deal secession decreases therefore supporting UK risk assets. Sterling and UK risk assets have been torn between the risks of no deal and a softer Brexit outcome. International asset allocators have shunned UK assets knowing that current prices are incorrect but unsure whether that is because it is too cheap or too expensive. Should parliament return in December with a mandate for Johnson’s deal, sterling will value the reduced no deal threat and continue the rally seen in recent weeks.

“Any rally in sterling will be restrained by the narrow timetable for negotiating the future trading relationship between the UK and the EU with the transition period currently due to end on 31 December 2020. This will ensure that the phantom of Brexit will live on, well into next year.”

Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors
“With more parties joining the government’s position, a UK election before the end of the year looks highly likely. An election could be the much-needed unblocker for the clogged political drain that is Brexit. However, the result needs to be decisive in favour of the pro-leave Conservative Party or the anti-no-deal rainbow of opposition parties. A narrow Tory victory, requiring support from elsewhere to form a workable government, could simply leave us in the same clogged political situation. However, it is also unclear how a coalition of Labour, Liberal Democrats and the Scottish National Party would coalesce around a target Brexit outcome, let alone wider policy objectives.

The latest polls indicate that PM Boris Johnson is benefiting from the progress made with the EU and his clear leave message, despite missing his “dead in a ditch” Halloween deadline. Labour looks likely to be the main loser, its vote share eaten away by both sides of the Brexit spectrum. A lack of clear, desired outcome - beyond blocking no deal - continues to hamper the main opposition party. Having a clear, cohesive leave message simplifies the Tory communication, allowing them to benefit from the division of anti-no-deal votes among multiple opposition parties in the UK’s first-past-the-post electoral system.
 
The pound continues to be volatile, with the hard-line stance of many in the Tory party creating worries about a potential hard Brexit, beyond the newly-agreed January exit date. Despite the moves in sterling, gilt yields remain around the Bank of England’s base rate of 0.75 per cent. Recent commentary from the Monetary Policy Committee external members has focused on the downside risks to the economy, suggesting a greater likelihood of interest rate cuts. After all, even during a Brexit transition period, continued uncertainty about the UK’s future relationship with the EU is likely to weigh on growth. Better US-China trade headlines and the first signs of a potential global manufacturing stabilisation have sent major sovereign bond yields higher recently. In this environment, gilts look a more attractive, defensive asset over the medium term, relative to other major government bonds.”

Luke Davis, CEO and founder of IW Capital
“Small businesses in the UK are undoubtedly hoping for increased certainty over the Brexit deal and leaving date. Once the deal is confirmed, the sentiment to push on with business will really be able to take off as entrepreneurs and investors look to capitalise on new opportunities that are bound to exist after Brexit. Over the last year or so, we have seen a concerted effort to get on with business, regardless of Brexit and the eventual outcome.

"One thing that we need to ensure is that entrepreneurs and investors looking to start or support a small business are not put off by the turmoil in Parliament. At IW Capital, we have experienced record deal flow and buoyant investor confidence. What Brexit ends up looking like will not affect the fantastic range of innovative, growing SMEs we work with that are likely to drive our private sector forward.”

Azad Zangana, senior European economist and strategist Schroders
"Once an election is confirmed, furious campaigning will follow. According to recent opinion polls, the Conservatives have a healthy lead over the Labour party, and are expected to win the election with a reasonable majority. This could of course change throughout the campaign, as previous prime minister Theresa May discovered in 2017.

The main threat to the government is the Brexit party. Led by Nigel Farage, it wants Brexit to happen as soon as possible, and without a deal. This version of Brexit could attract enough voters to split the support for Brexit and ultimately allow the Labour party to make gains. However, if the government wins a majority as expected, it will be able to push its latest version of the Brexit deal through the legislative procedure with little resistance.

For the economy, a smooth Brexit with a transition period removes a great deal of downside risk for the UK economy. We would expect business investment to rebound with the reduction in uncertainty, while households could also increase spending. The build-up of inventories will have to be worked through, which will be a drag on growth, but this would be complete by the end of 2020. Overall, we could see a gradual acceleration in GDP growth and confidence.

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