Brexit – No resolution in sight

Pacome Breton

read 3 min

We wrote last week about the prorogation of parliament and how this week was likely to be eventful. The least we can say is that we haven’t been disappointed.

European Union and UK flags in front of Big Ben, Brexit EU

From a political standpoint, while Prime Minister Boris Johnson appeared to have won the first step with a highly tactical “coup”, the counterattack was more brutal than many, including himself and his advisers, probably anticipated.

What happened since last week’s prorogation news

Boris Johnson lost his majority of one with the defection of a Conservative MP to the Liberal Democrats.

Parliament voted to take back control of the agenda and 21 centrist Conservatives, including some prominent figures, were expelled from the party.

Parliament then backed legislation to stop Britain leaving the European Union without a deal. This bill is currently going through the House of Lords, and while it was thought that pro-Brexit peers could hold up the bill, Lord Ashton of Hyde confirmed that all stages would be completed by Friday 6th September, to be presented for Royal Assent before the prorogation of parliament.

The bill requires the prime minister to negotiate a deal with the EU. He must then pass that deal through parliament – or get parliament to approve a no-deal Brexit, which is unlikely – by 19th October. If he were to fail, he would need to ask the EU to extend Brexit to 31st January 2020.

In a last blow, the prime minister was denied the right to call an election by mid-October when Labour and Liberal Democrat MPs abstained from voting on his election proposal, claiming they didn’t trust him not to dissolve the government before the aforementioned bill could get Royal Assent.

It is proving to be a difficult week for Boris Johnson, and though an election is likely, the outcome of the Brexit negotiations is still far from clear and the result of a potential election is uncertain.

What do these Brexit developments mean for markets?

Markets reacted to the news in line with the trends that have prevailed this year. The increased likelihood of a no-deal Brexit is unfavourable to the pound, particularly to the pound’s exchange rate with the euro, which tends to act as a barometer of Brexit.

Between the announcement of prorogation at the end of August and Tuesday 3rd September, the pound/euro exchange rate fell 1.5%, but it has since regained close to 2% as the chance of a hard Brexit has diminished in the eyes of the market.

UK equities and government bonds were partially impacted by the Brexit mood, but the effect was less noticeable than the effect on the pound. Brexit is only one driver of the performance of these assets, which are generally correlated to the world equity and bond markets.

What does it mean for your investments with Nutmeg?

Our base case remains unchanged from last week. We believe an election is coming and the outcome is uncertain. It is expected that the next vote on calling a general election will be on Monday or Tuesday after the bill is made into law.

Though Boris Johnson could still surprise us by choosing an unconventional option, such as calling a vote of no confidence in his own government, we think he will succeed at some point in getting an election. The probability of a hard Brexit has increased lately, but events this week have shown it is far from being the central case.

To reduce risk on our portfolios, we have decreased our overall equity allocation, particularly our exposure to small and medium-sized UK companies. We have also shifted some pound exposure to the US dollar. We want to be cautious without taking a radical view as all options remain on the table.

We are ready to act again by shifting the profile of our fully managed portfolios if one of the possible scenarios becomes more likely. At the moment, with all scenarios still open, we are keeping a balanced view while we actively monitor the UK political landscape and UK markets.

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.


Pacome Breton
Pacome is an investment manager and head of risk at Nutmeg with more than ten years' experience in investment and risk management. He previously worked for a US family office and a large European asset manager and started his career at Société Générale in Tokyo. He holds an MSc in quant finance from Bocconi University in Milan and is a certified financial risk manager and chartered alternative investment analyst.

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