Does No Brexit Mean No Brexit?

by: Peter Cooper

Halloween horror: Brexit extension to October 31st.

Is the Brexit ever going to actually happen?

Contrarian buying opportunity of the century.

Be greedy when others are fearful!

So the financial markets judged the Brexit - Britain’s so far failed attempt to leave the European Union, correctly. The ‘no deal’ Brexit that would have seen the United Kingdom crashing out of the EU tomorrow, without any transition agreement, is not going to happen. It would have been a disaster: Brexit Black Friday On April 12th

Indeed, the Brexit is now to be postponed until Halloween, October 31st, unless of course a further extension to the deadline is agreed, or a deal is done before then. That was the result of a late-night meeting of the 27 heads of state of the members of the EU, except the UK, on Wednesday.

Observers around the world have become totally bemused by this extraordinary exercise in democracy that began almost three years ago with a narrow win for the Brexit in a referendum of all British citizens, excluding the three million who live abroad (who might well have voted to stay in the EU). Since then the British Prime Minister Theresa May has personally negotiated a tortuous withdrawal agreement with the EU. This same agreement has now been rejected three times by a large majority by the House of Commons, the British parliament whose ratification is required for it to become law.

Democratic disaster zone

It is a democratic impasse unknown in modern times in the UK, that likes to reckon itself the mother of all modern democracies. How will this be resolved over the next six months? The omens are not particularly good. Cross-party talks will continue to try to find a compromise deal that could get through the House of Commons. But any deal that comes out of such talks will necessarily alienate sections of the two parties involved and risk falling flat again in an open vote.

Still, that will be the first objective if the UK is to avoid having to take part in the European Parliament elections being held on May 23rd. But that only allows six weeks. Given that any deal reached between the parties may well include a second referendum (the opposition Labour Party’s official policy is for a people’s vote on any final deal), this looks almost impossible. European Council President Donald Tusk asked the UK ‘not to waste this time’ in his final communique last night. However, all the evidence to date - and it is almost three years since the referendum - suggests this is the most likely course of events.

For the time being though Britain remains a full member of the European Union. At some stage its political system will come to a decision on what to do next. But for the moment that looks unlikely, with no consensus on the way forward. Even holding a General Election would not necessarily provide a coherent path ahead given the large number of conflicting options available; and that election itself is improbable as polls show the ruling Conservative Party would likely suffer a catastrophic defeat and so would not call it unless forced to do so by parliament.

Extend the extension again?

When the next European Summit is held in June, then it would surprise nobody if a further extension for the UK Brexit was on the table. Perhaps this is an issue just too complicated for a decision by the British political system and one will never actually be made. Support for a petition to revoke Article 50 and cancel the Brexit altogether reached a record-breaking six million last month. Could it be the future is no Brexit at all? Mrs. May warned her lawmakers often enough that failure not to pass her deal carried this risk.

In the meantime, the Brexit hangs like a black cloud over the EU, even it has not actually been implemented. For the UK it means delayed investment plans, reduced foreign direct investment, and a significantly lower exchange rate than without it. The financial heart of the EU is stuck in political paralysis. On the positive side, the EU 27’s remaining members (well still 28 as it happens) are more united than ever. They have displayed unity of purpose and intent in dealing with the UK through this difficult period.

If they can hold on to their second largest member by GDP, then there must surely be a good contrarian argument for US investors to look at top European shares while they sell on price-to-earnings ratios well below US stocks and with the US dollar so strong against the euro. This crisis is an opportunity to buy quality assets cheaply. BMW? Mercedes? Rolls Royce? There is a lot of quality among European companies.

Contrarian play

Indeed, from the global macro point of view, this could be the best strategic opportunity today. The EU28 are after all an economic bloc with a $16 trillion GDP, ahead of China and second only to the USA whose leadership could easily be lost on the next big currency swing. Investing in this huge economy when its fortunes are down could be the contrarian play of the decade. The idea of selling Wall Street and buying the EU might sound like madness but whose stocks are trading near record valuation levels? Is selling high and buying low not what intelligent investors do?

Imagine if the EU28 (including the UK) really got their act together, or just muddled forward to a better stage of the business cycle. As Warren Buffett says: 'Be greedy when others are fearful!'

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.