Tailback on the road to Brexit – when the barriers don’t lift

Brad Holland

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Last night, parliament rejected all forms of resolving the Brexit crisis. MPs said no to a hard Brexit, no to a customs union, no to Norway+, no to a second referendum and no to revoking Article 50.


The failure of all indicative votes in Parliament on Wednesday night shows the way forward is still not obvious. And so, we wait for the third vote on Theresa May’s deal; if, that is, the Speaker of the House allows the Prime Minister to present the bill again. 

The EU has given the UK two routes out of the current Westminster log-jam. First, if the Withdrawal Agreement Bill is ratified by parliament before the 29th March deadline, the UK will have until 22nd May to pass all necessary legislation. But if the deal does not find passage through parliament before the 29th March deadline, then the UK would only have until 12th April to propose a way forward to justify an extension. 

Here is our thinking on the politics if the Withdrawal Agreement Bill fails a third time or the Speaker doesn’t allow a third vote. 

Parliament fine-tunes indicative votes on Monday

A second round is likely to include the most popular options from the first round; the top two being for a public vote on any Withdrawal Bill and for a Customs Union as part of the future partnership with the EU, as proposed by Ken Clarke. The vote on Monday may be structured differently, trying to ensure one positive outcome. But it needs to be said that neither of these two options are full-blown plans, and just how any result finds its way into legislation is subject to uncertainty – if not confusion. The UK Parliament finds itself in unchartered waters. 

Possible next moves for the PM

The PM has said in parliament that she will not allow a “no deal” exit unless it is endorsed by parliament, in the full knowledge that no such endorsement will be forthcoming as parliament has rejected it twice already by a large majority. So, this “hard Brexit” scenario is the least likely.  

The PM has said that a longer extension is a real possibility. But the EU will not accept this unless there is a serious change to the prospect of resolving the matter. One way to show this is by calling a second referendum, in acknowledgment that parliament is as split as the country on the EU issue. The referendum question could be to either accept the Withdrawal Agreement as it stands or to revoke Article 50. The PM would remain at Number 10 until the referendum result and then resign. Under this scenario, there are still the EU parliamentary elections on 23rd May to consider. The EU is likely to allow sitting UK MEPs to remain until the situation is clarified one way or the other. 

The PM, on the other hand, may choose to stand down as leader to let a new negotiation begin. That may mean a revocation of Article 50 so that the UK has time to reassess its commitment to Brexit. The process can begin at any time chosen by the UK Parliament. 

The real problem faced by the Conservative Party if Theresa May’s Withdrawal Agreement Bill is not passed, is who will replace her as leader? This decision must surely be with an eye to a possible early general election, and so the choice between a pro-remain and pro-Brexit candidate threatens to continue stoking the disruption on the Conservative side of politics.

The Nutmeg view

We have, so far, believed that a deal was likely, if not by 29th March then early in an extension period. There is still a chance the deal will pass by Friday 29th March, even if the probability has fallen. However, the probability of no-deal and a hard Brexit has also fallen, and so a sudden exit out of the EU is the least probable outcome. But the possibility of an early election has also increased, although it is not our base case. 

We think, whether we go down the second referendum route or towards a Customs Union, these are both softer Brexit outcomes – potentially no Brexit at all.    

Market implications

As we believe nodeal is still the least likely outcome, we expect that some form of resolution to this crisis will produce a stronger currency and higher bond yields that are both still pricing for the (small) risk of a harder type of Brexit. As well as thiswe expect better performance of small and middle-sized stocks compared to larger ones. Larger stocks suffer markdown on their overseas earnings when the pound rises. 

Meanwhile, prospects for a Labour government are higher unless Theresa May gets her deal through. That will have its own different impact on UK asset prices and the currency, and we will assess the risk if it arises. But the potential prospect of an early general election will not be lost on the hard Brexiteers, and may form part of their motivation to finally acquiesce to support the Withdrawal Agreement Bill.

Updated: Thursday 28th March 5.30pm

MPs will be asked to vote again on the Brexit Withdrawal Agreement on Friday 29th March after Speaker John Bercow said the new motion brought by the government was “substantially different” to the Withdrawal Agreement Bill that has faced two defeats in the House of Commons already. MPs will only vote on part of the deal negotiated with the EU – they will vote on the so-called divorce bill, citizen’s rights and the backstop agreement. They will not vote on the political declaration on the UK’s future relationship with the EU.

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 or future performance indicators are not a reliable indicator of future performance.

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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