Boris Johnson’s suspension of parliament from 9th September to 14th October is seen by many as a “coup” to curtail efforts by MPs to prevent a no-deal Brexit. The news came as a reminder that the summer holiday Brexit blackout is over. The political race is now surging towards the 31st October Brexit deadline.
We wrote last month that our base investment case was an early general election leading to either a hard Brexit or a second referendum. We still believe an early election is the most likely scenario, but there are multiple possible pathways leading to and following October 31st.
The window to trigger a vote of no confidence will be narrow, but it seems a real possibility. An even slimmer window is open for MPs to bring alternative legislation to a vote. Both opposition and rebel MPs are motivated by what they perceive as the prime minister’s attempt to suspend parliament to force a no-deal Brexit.
It is difficult to anticipate precisely how each scenario will play out – prorogation of parliament, a vote of no confidence, a call for a general election – but of the three, we still believe an election is the most likely outcome. After that, the different options from hard Brexit to a second referendum are all on the table.
Having said all that, there does now seem an increased probability for a hard Brexit. As a result, we expect heightened market volatility in sterling and UK assets leading up to 31st October as both sides reveal their cards. Boris Johnson played the first hand. The counterattack should come quickly and this back and forth game might last up to the last minute.
What are we doing to prepare?
With many options still on the table, we have kept a cautious stance during the month:
- We have reduced our overall risk across our various risk profiles by reducing equity allocation and increasing fixed income exposure. Specifically, we have increased our exposure to US treasuries and corporate bonds.
- We have significantly reduced our FTSE 250 exposure to reflect heightened domestic risk for UK equities, reasoning that small and medium-sized companies would be impacted much more than large British multinationals.
- We have shifted some sterling exposure to the US dollar.
- We have bought some low volatility equities to reduce the volatility level of our equity allocation.
We continue to actively monitor developments and stand ready to adjust our fully managed portfolios as we see fit. While we usually like to avoid being too reactive to the news flow in normal times, these are not normal times.
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.
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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.Other posts by Pacome Breton