Brexit breathing space: breathe in – hold – and breathe out

Brad Holland

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The UK has breathing space on Brexit, with the EU granting a flexible extension to give us a spooky new Halloween deadline of October 31st. It can be over a lot sooner though; as quickly as Theresa May’s now infamous Withdrawal Agreement makes its way through Parliament. Having failed three times already, what are the chances of the agreement getting through, given that the EU stubbornly insists no further renegotiation is possible?


It’s important at the outset to remember that the legally binding withdrawal bill doesn’t address the nature of the future trading arrangement between the UK and the EU. It addresses the financial divorce settlement; individual rights; agriculture and fishery policy; and of course, the issue of the Northern Ireland border.

What are the options as we see them, and should you hold your breath for a speedier resolution?

1. A cross-party deal

One possibility is that the Prime Minister strikes a deal with the Labour Party that keeps the UK in a customs union for the trade of goods (not services) with the EU. That leaves the Northern Ireland backstop as a non-issue since there will be no need for customs checks at the border. There will, however, need to be some form of passport check because the free movement of people across UK/EU borders will end even with a customs union.

The UK wouldn’t have the power to make new deals with third countries in goods trade, but it would be able to forge new agreements in services. Consequently, the UK will be a rule-taker in goods standards and regulations. That would be a small price to pay for two reasons. First, goods production is a small and reducing part of the UK economy (under 14% at last measure1). Second, the problem is trivial because the UK wouldn’t want to undercut EU production and safety standards and the EU would never want to undercut global standards.

The Prime Minister hopes to unite parliament, having spectacularly failed to rally the fractious forces on her minority government. She feels this unity would help begin to heal the rift exposed in the wider UK population. It may also minimise the electoral damage done to the Conservatives by sharing the responsibility for the final outcome.

2. Conservatives rally around Theresa May’s deal

This seems a very unlikely outcome, but the real prospect of a cross-party agreement might just spur hard-Brexiteer Conservatives to quickly unite behind the Withdrawal Bill, so they can get on with influencing the future trading arrangement.

The hard-Brexiteers have already lost hope of the UK crashing out and coming under World Trade Organisation (WTO) tariff arrangements. So, the best that the hard-Brexiteers can hope for is to influence the terms of the future trading relationship. Remember, Theresa May has said she will stay as PM only until the Withdrawal Bill is passed. The resulting leadership election won’t be a painless exercise for the Conservatives. However, Brexit-leaning Conservatives believe a new leader (with their likely front-runner Boris Johnson) would be well placed to argue their case in the next phase.

3. No deal and revocation of Article 50

This is still a real possibility. Labour may make the political calculation that their best chance to achieve a General Election is to frustrate Prime Minister May’s deal causing her to stand down as leader. Parliament would then have no choice but to revoke Article 50 because it has already ruled out a no-deal situation.

The complicating factor here is that if all this doesn’t occur before May 22nd, the UK will have to participate in the May 23rd EU elections. That could prove politically damaging for Labour as well as the Conservatives, because 70% of Labour-held constituencies voted to leave the EU.[1]  This suggests that the time for cross-party talks is limited.

So, what does Nutmeg think?

Our thinking has shifted over recent months as it became clear the Conservatives were not rallying behind the Withdrawal Agreement and Parliament wrestled control of the process from the Prime Minister. Our base-case has shifted from “the deal will be passed – eventually” to “no-deal is very unlikely.” The portfolio implications of these two, however, are very similar; rising UK currency and bond yields, and better performance in small-medium size companies compared to larger globally-based UK businesses whose earnings will be marked down by the stronger Pound Sterling. The risk to this scenario is the lower probability event of an election won by Jeremy Corbyn. His policies may cause the currency to fall, not rise. We continue to monitor the situation – necessitating much deep breathing – and we’re ready to adapt the portfolios as the politics unfolds.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance.


  1. UK Office For National Statistics; December 2018
Brad Holland
Brad is Nutmeg’s director of investment strategy. A veteran – 28 years at last count – in financial markets, he started his career as a professional economist at the Australian Reserve Bank. He now specialises in economic and financial market strategy within investment management. Brad studied post-graduate quantitative economics at the University of Queensland, Australia. Despite living in London for 20 years now as a naturalised British citizen, he’s still not quite ready to support England-v-Wallabies.

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