Prepared for all outcomes – Nutmeg’s Brexit update

Brad Holland
12 March 2019
read 3 min

We hope you enjoy this article from our archives. As investment, pension and tax rules change a lot over time, the information in this post may not be current, but we hope you still find it interesting.

Will parliament pass Theresa May’s deal today? There is certainly more chance than when it last faced a vote on 15^th January, particularly after the Prime Minister’s last minute talks with the EU in Strasbourg. But even if that doesn’t occur, the Prime Minister has a plan.

Mrs May’s government will invoke two further amendable motions.

The first, which would take place tomorrow (13^th March), will ask if parliament prefers “no-deal”.
The second vote, either on the 13^th or 14^th March, if Parliament declines no-deal, will be to approve a brief extension of Article 50 to prevent crashing out on 29^th March and to allow time for further negotiation with the EU.

The crucial point is that a no-deal looks now to be a very low probability event in March.

Theresa May has not indicated how much extended time she will ask for, but she wants it wrapped up by 2^nd July when the new EU parliament convenes.

Portfolio impact

The impact on UK financial markets from either a deal or an extension that leads to a deal are very similar; a strong UK currency, rising gilt yields and a likely outperformance of UK small and middle-company stocks over large companies.

Large companies derive a larger share of their profits from overseas sales, and a stronger UK pound-sterling marks down the value of those profits in UK currency terms. The currency and gilt yields remain well below levels prior to the 2016 Brexit vote, as a worst-case Brexit scenario was priced-in. A deal will mean this can be unwound, causing the pound to rally and gilt yields to rise. Rising gilt yields is bad news for bond investors as price and yield are inversely related.

Still no guarantee

There remains, at least, the possibility that an extension to Article 50 merely postpones the cliff-edge from March 29^th to sometime before July. In this event, the Prime Minister will have three options.

The first is to leave the EU without a deal. But we expect her to honour parliament’s wish (vote on March 13^th) for this not to occur.
The second option is to rescind Article 50 and put an end to the withdrawal process. But Theresa May has vowed she will not do this.
The third option – made available by the European Court of Justice ruling of late 2018 – is to pause the Article 50 process. At this stage a second referendum becomes more likely, and the UK’s participation in the Spring EU elections needs to be considered. At this point, it’s possible that Theresa May would resign, having failed to carry her party and parliament through to Brexit. Then, the political picture becomes very unclear, and probably negative for UK assets.

In summary

Nutmeg takes the view that a deal will be passed either today (on 12^th March) or soon into an extension period, leading to adjustments in UK asset prices. Fully managed customer portfolios have been positioned for this, but still, we remain vigilant. And we stand ready to respond to a more unfavourable outcome. A day is a long time in politics, particularly in this end-phase of UK-EU negotiations.

We’ve used the BBC’s handy flowchart to illustrate how today’s decision will impact the countdown to March 29th. See here for more

Mrs May's revised Brexit timetable. Source: BBC

Source: BBC News online

Key dates

March:

12^th UK Parliament’s vote on Withdrawal Agreement

13^th Deadline for Cooper-Letwin amendment; Vote in support of no-deal; Chancellor Spring Statement

14^th Vote in support of Article 50 extension (June at latest)

21^st EU Council Summit

29^th UK withdraws from EU

23-26^th EU elections

April:

2^nd New EU Parliament convenes

December 2020:

31^st End of transition period

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.

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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.