With just days to go before the 31 October deadline, the European Union has granted a further extension to the timetable for agreeing the UK’s departure from the EU.
Boris Johnson pledged he would rather “die in a ditch” than delay Brexit, but he eventually requested an extension under duress from Parliament after being unable to navigate the various legal and political barriers to leaving at the end of October.
Developments in Parliament have moved rapidly over recent days, with plenty of twists and turns in the Brexit process. While Johnson received the backing of MPs for a deal, his proposals to fast-track the necessary legislation to get Brexit done were rejected. Now the EU has agreed to grant another extension.
In this Insight, we look at what may lie ahead for investors and the economy.
What happens next?
The Brexit deadline has moved back once more and, as we wrote when Mr Johnson took over, that always seemed the most likely outcome. However, even if he has fallen short of his own commitments there can be no question that he has surpassed our expectations by getting as close as he has to a Brexit deal. That has been reflected in the recovery in the pound since the darkest days of early October when such a deal looked highly unlikely.
Meanwhile, receding fears of a disorderly no-deal Brexit may buoy domestic and foreign investors’ confidence, with Johnson managing to secure a revised withdrawal agreement. While the movement in the pound relieves the pressure on those companies which derive a majority of their revenues from the UK, most notably retailers, some banks and many participants in the construction industry, it remains a headwind for the majority of large UK companies which generate most of their revenues overseas.
It may not be plain sailing from here – this is after all still just the beginning of the process. The bill passed its first reading on the assumption that it could be amended before passing. That is why Parliament voted down the programme motion which would have fast-tracked its passage: to allow time for further amendments. However, any tinkering threatens to upset the fragile edifice of support upon which this bill has so far rested.
Thereafter, what remains to be determined is the UK’s future relationship with the EU. With the exception of Northern Ireland the UK will no longer be in a customs union with the rest of the EU. That in itself makes trade more difficult, but it may yet be more expensive as well, depending upon whether negotiations between now and December 2020 result in tariff-free trade or so called World Trade Organisation terms (subject to tariffs and what many would still regard as a ‘hard Brexit’).
The potential passage of the Withdrawal Agreement Bill and the potential future arrangement with the EU could both be dramatically altered if Parliament approves a general election. As it stands the polling favours the Conservative Party, perhaps not so much in terms of their overall share of the vote, which languishes below the levels seen in recent years, but rather relative to their closest opposition the Labour Party who would probably need to support an early election if one were to happen, but whose own Brexit stance has struggled to gain traction with voters. The split of the opposition vote and the resonance of the Conservatives as the most credible major party that is committed to Brexit appears to leave them in a strong position. However, as 2017 showed, a strong position can quickly be lost once campaigning starts.
What does this mean for investors?
A backdrop of prolonged uncertainty remains, albeit with a no-deal outcome off the table for now. Yet whatever the process of Brexit over the coming months, it most likely shouldn’t disrupt your investment plans. We believe it’s better to focus on how you want your money to work for you, rather than on short-term political noise.
Besides, there are plenty of global events at play which may have a greater impact for investors. The US and China are in the midst of a trade war, while Germany is battling a looming recession.
However, there are strategies we deploy to help mitigate investment risk. Portfolios are diversified across a wide range of assets and geographical regions in order to minimise any potential stock market shocks. While one asset or area of your portfolio may suffer losses, another may produce gains. Focusing on the long term and your original investment goals may also help prevent knee-jerk reactions which could crystallise losses.
We continue to believe that equities look appealing for long term gains, and any turbulence that lies ahead may present us with an opportunity to invest in quality stocks at attractive valuations. While many investors may fear uncertainty, it does create opportunities for stock pickers across all areas of the market.
Guy Foster, Head of Research
Guy leads Brewin Dolphin’s Research team, providing recommendations on tactical investment strategy to Brewin Dolphin’s investment managers and strategic recommendations to the group’s Asset Allocation Committee. He is a CFA charterholder, holds the CISI Diploma, and is a member of the Society of Business Economists. Guy frequently discusses financial issues with the written and televised media as well as presenting to the staff and clients of Brewin Dolphin.
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