By Ben Lofthouse & Bethany Payne, CFA
Ben Lofthouse and Bethany Payne respond to the rejection of May's Brexit deal and the uncertainty that surrounds the UK's future relationship with the EU.
Ben Lofthouse, Head of Global Equity Income
Prime Minister Theresa May's Brexit deal was defeated by a massive 230 votes in the House of Commons Tuesday night, with members of Parliament voting 432 to 202 to reject the deal. The outcome, therefore, of Brexit is still highly uncertain, despite the fact that the official deadline to leave on March 29 is looming. While a "hard Brexit" seems to be in few parties' interest, the events of the last year show how much business and investor sentiment can be impacted by political events. The plus side of this uncertainty is that many equity markets around the world, including the UK, are significantly cheaper than a year ago and offer a wide range of investment opportunities that allow investors to diversify their country and sector exposures to seemingly binary situations. It's "wait and see" in terms of understanding the UK's future relationship with the European Union, and as a result, market uncertainty looks set to continue.
Bethany Payne, Global Bond Portfolio Manager
The pound strengthened as UK Prime Minister Theresa May's Brexit deal was rejected in a historic defeat in Parliament on Tuesday, January 15. The scale of the defeat, which is in line with commentators' worst expectations, increases the pressure on Theresa May to find a compromise that could garner cross-party support.
The EU27 will probably not concede anything more, as it is not clear what could gain approval in the House of Commons. It is instead more likely that at this stage, compromises are reached in-house, leading to a "softer" Brexit or greater concessions to the Labour party over protection of workers' rights and environmental standards.
Conservatives will now have to try to find equilibrium between softening the deal and maintaining the fragile truce within the Cabinet.
Sterling rallied further shortly after the result of the vote on Tuesday evening when the leader of the Labour Party, Jeremy Corbyn, called a vote of "no confidence" in the government. Theresa May is widely expected to survive this with the support of the Democratic Unionist Party (DUP) of Northern Ireland.
This increases the probability that the Labour Party pivots toward supporting a second referendum, which will be seen as positive for the UK, as it increases the chances of "no Brexit." However, any hopes may soon be discounted, as amendments to Theresa May's motion on Monday may stipulate indicative votes on alternatives to the deal, which is likely to confirm that there is no majority yet for a second referendum in Parliament.
While near-term developments may look supportive of a softer deal and compromise in the following days, it is hard to see a straight path to a final deal. Any near-term optimism and strength in the pound may not be maintained until the political risk premium is removed. What is clear is that it is highly likely that Article 50 will be delayed to allow a grace period for the UK to be able to pass the necessary legislation that prevents it crashing out without a deal.
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