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Brexit defeat for May sees pound jump but further uncertainty looms

Last night, prime minister Theresa May suffered a historic defeat, with MPs overwhelmingly rejecting her proposed Brexit deal. As the Labour Party hit back with a no-confidence motion to be debated today, leading investment experts discuss the chaotic road ahead.

Richard Buxton, head of UK equities, Merian Global Investors Richard-Buxton-600x385.jpg

With the no confidence vote in the government, and against the backdrop of a commitment by the prime minister to work constructively across parliament to seek some form of consensus, there is, in my view, an increasing likelihood that a ruinous no-deal Brexit is likely to be averted.

In recent days, sterling has strengthened against the US dollar and the euro, as investors increasingly perceived that the risk of the UK leaving the EU without a deal was receding as parliament asserted its authority.

The UK equity market has similarly strengthened recently, with the strongest bounces seen in more domestically focused companies such as retailers.

Notwithstanding increasing optimism that a no-deal scenario can now be avoided – there is clearly no mandate for that outcome, either – continuing uncertainty over Brexit will remain a significant “handbrake” on the UK economy and UK stock market. Only when certainty over the UK’s future relationship with the EU emerges is business confidence and investment, and indeed consumer confidence, likely to return. Until such a time, the “handbrake” will, I believe, remain obstinately jammed. Any extension of the Article 50 process would, in my view, simply perpetuate the present impasse.

In the event of some form of the government’s deal ultimately garnering sufficient support to pass through the House of Commons, I believe sterling would once again strengthen, although I do not see it regaining pre-referendum levels versus the US dollar or the euro; a strengthening in the region of 5-8 per cent would seem more likely than the approximately 15 per cent rally by the pound that would be required to regain those pre-referendum highs.

Laith Khalaf, senior analyst, Hargreaves Lansdown Khalaf-Laith-2009-500.png

The pound has become the market’s Brexit barometer, and it’s been a volatile night as currency markets digest proceedings in Westminster.

Sterling gained ground following the vote, but only recovered ground it lost earlier in the day. Markets think a softer Brexit may start to take shape now the vote has failed, as parliament gains greater control of the process. This is a change in dynamic, as previously government failures have heightened expectations of a hard Brexit, and have weighed sterling down.

Clearly there’s still no certainty to be had, and tomorrow’s vote of no confidence provides another pinch point for currency markets, so we can expect further swings in sterling as events develop.

The reality is there’s no correct price for sterling until there’s greater resolution on the direction of Brexit, what we have right now is a middle ground between competing possibilities. Assuming Brexit does resolve itself one way or another, the pound will ultimately find a new level, but it’s not going to be a smooth journey.

Saker Nusseibeh, chief executive, Hermes Investment Management 

In response to last night’s historic vote, we have to consider three key strands. First, as a business, we have been running a Brexit mitigation project based on the presumption of a “hard Brexit” since the referendum, and have planned accordingly. Therefore,  we are ready for the business conditions, whether the outcome be a new referendum, a delay of Article 50, a deal or no deal.

The second strand concerns the effect on the markets.  We are watching closely to understand the secondary effects on stocks and currencies, inclusive of sterling, and the specific industries that are tied to frictionless trade.

The third strand, and possibly the most important, is to understand how we as a firm, and individuals, can contribute to mitigating the risks associated with any outcome to our country. In particular the impact on the pensioners whose capital we look after.  Most people would prefer to see an end to uncertainty.  However, the sad truth is that continued uncertainty has prevailed, and there appears to be no clear plan B.

Chris Cummings, chief executive, Investment Association 
It is extremely disappointing that after such long negotiations the Brexit uncertainty continues.
It is critical that every effort is made to avoid a no-deal exit from the EU, and the potential cliff-edge effects that this could bring. While asset managers have been working on no-deal contingency plans for a long time and are prepared for this scenario, it still remains the least desirable option for our industry, and for the millions of people who entrust us with their pensions and savings.
It is imperative that the regulatory co-operation agreements are finalised so that firms can plan with certainty and the savings of millions of people in Europe can continue to be invested wisely and managed across borders.
Given the uncertainty that today’s result brings, firms will continue to keep their no-deal contingency plans under review.

David Zahn, head of European fixed income, Franklin Templeton 

We estimate the chances of no-deal Brexit at around 30 per cent to 35 per cent currently.

The impact of such an outcome would be significant, but we don’t think a hard Brexit would necessarily be the end of the world. In many ways, it could offer the quickest route to the certainty that markets crave.

A no-deal Brexit would likely mean heightened levels of uncertainty for three to six months as things get worked out. In many areas, the EU has said it will extend the status quo ante for the next year while the two sides adjust to the new environment.

The initial response would likely be negative: we’d expect bond markets to rally significantly; gilts would probably revisit their historic lows. But our perception is that if a hard Brexit were confirmed, things could only get better.

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There is one comment at the moment, we would love to hear your opinion too.

  1. We are cock up world champions. What this does to our global reputation doesn’t bear thinking about.

    All we now need is a Corbyn government to make the misery complete.

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