Deadlock at Westminster…but no real surprises

Should you be weary of hearing about the ‘B’ word and its ramifications, you may, of course, wish to fast forward through the first part of the update and focus on our general investment stance which you will find at the end.

• As widely anticipated, Tuesday’s vote on Prime Minister Theresa May’s withdrawal agreement was voted down by what proved to be the largest ever margin in political history.
• Subsequently Jeremy Corbyn tabled a Vote of No Confidence which, when taken to the vote come out in favour of the Government.
• While Mrs. May’s agreement lacked support, she still appears to have enough Party backing to avoid a potential General Election in the short-term

What is the issue with the Withdrawal Agreement?

• The main issue is the promise to leave the CUSTOMS UNION (in which the UK and Europe have a common tax/tariff policy for all non-EU imported goods and services).
• This was one of Theresa May’s ‘RED LINES’, as are Restricting Immigration and Freedom from the European Courts as she believes this is what people voted for.
• Leaving the Customs Union so the UK is free to trade with the rest of the world without barriers has long been one of May’s promises. After all, it is one of the only benefits of leaving the EU, although now appears less likely.
• Leaving the Customs Union causes issues at the Irish borders introducing the need for customs and regulations checks. That border could be between the Republic of Ireland and Northern Ireland, but that breaks the Good Friday Agreement and divides Ireland, something nobody wants. The border could be between the UK and Northern Ireland (across the Irish Sea!) dividing Great Britain. Also not desirable, but preferred by the EU.

Theresa May has been trying to please both sides – hard-line Brexiteers, by promising to leave the Customs Union and everyone else, by temporarily remaining in the Customs Union (the ‘BACKSTOP’) until a technological solution can be found to address the border issues.

Labour, on the other hand, is calling for the UK to remain permanently in the Customs Union and Jeremy Corbyn is quite clear that ‘no deal’ is out of the question.

What now?

• There will likely be a delay in leaving the EU pushing back the 29th March leave date.
• The likelihood of another referendum is also increasing in probability although only if Westminster cannot agree another solution first as appetite is not yet sufficient. This increases the chance of NO BREXIT.
• Most likely, we feel the deadlock in Westminster and recent tone appears to indicate a higher chance of a ‘SOFTER BREXIT’ (ie remaining in the Customs Union for example)
• Less likely, but not ruled out, is that the EU may give some concessions – sufficient to obtain agreement from Parliament.
• Least likely, deadlock remains, hindered by Labour perhaps, in order to create further conservative chaos thus increasing the chance of a General Election or even a ‘no deal’, which is not off the table. These two outcomes would be the most negative for stock markets.

How have markets reacted?
Recent events were largely priced into markets as all outcomes were in line with expectations. Therefore there has been little adjustment in stock market values. If anything, investors are interpreting events to mean a higher chance of remaining more closely tied to the EU (a ‘Softer Brexit’) which is a more market friendly outcome. The stronger pound and outperformance of the more domestically sensitive FTSE 250 are evidence of this.

KMD’s thoughts from an investment perspective
Our stance on Brexit has not changed since we first laid out our view before the vote to leave the EU in 2016. The UK leaving the EU is negative for trade. However, in global terms, we believe the impact in isolation to be small and not enough to de-rail the UK/European economies, let alone the global economy. That is not to say that in recent months there have not been other reasons to remain cautious. There are, but that is not the focus of this update.

One of the main outcomes from leaving the EU has been a weaker Sterling. This is a positive for the UK economy and a significant driver in the UK being one of the best performing stock markets in 2016 (in local currency terms). For this reason you could argue that UK stocks may not rally strongly if a ‘softer’ or ‘no Brexit’ outcome significantly strengthens Sterling.
We would also reiterate that in traditional economics, if someone loses out then typically, somewhere else someone is set to gain. KMD invests globally and, in simple terms, if Europe was to gain from the UK leaving, our portfolios are invested in Europe and would benefit from any improved performance in European share prices.
Interestingly, it is important to note that although Brexit is dominating the headlines, we are actually becoming more positive with regard to the outlook for the UK stock market. Share price valuations are not expensive and with a lot of bad news priced in, we see a greater chance of an upside surprise in UK stocks relative to other regions.

The details, views and opinions expressed above are KMD’s, can change at any time and are not intended to be advice or a solicitation to make an investment. Professional advice should be sought before acting on any information contained in this document. The value of investments can fall as well as rise and your capital is not guaranteed. Past performance is not a reliable indicator of future performance.