With every milestone, the UK’s position on Brexit becomes no clearer. Julian Broom, Chief Investment Officer, explores the impact of the recent developments in UK politics:

The EU elections have heaped more pressure on the established UK political parties to find a way forward on Brexit. The Labour party was the first to blink with Jeremy Corbyn committing his party to a second referendum. The position of the Conservative party is far more complicated. Candidates for the leadership of the Conservative party, and hence Prime Minister are splitting into two camps – those, like Boris Johnson, who would take the UK out of the EU at the end of October even with a no deal and those on the other side who would continue to find a pragmatic approach to leaving the EU.

The EU election results in the UK although characterised as a ‘big win’ for Nigel Farage and his Brexit party in fact highlighted the ongoing split in the country. While Nigel Farage’s Brexit party won 29 seats, pro-Remain parties (the Liberal Democrats, the Green party, the SNP) won 26 seats alongside the mainstream parties’ position Labour (10 seats) and Conservative (3 seats). If you add in the pro-EU parties in Scotland and Wales, the remainers would be in the majority.

Some commentators have raised the probability of a no-deal Brexit to over 25%. Such an outcome bears the most significant risks to the UK economy and the UK financial markets. By default, the UK will fall out of the EU in October if no alternative is found. Current understanding of Parliamentary procedure suggests that Parliament cannot stop a no-deal. However, it is worth noting that the current speaker of the House of Commons has a reputation for interpreting house procedures to give more power to the MPs over the government.

The best way to avoid a no-deal exit is for the House of Commons to find an agreement that has majority support. This has eluded them thus far. A great deal will depend on who will emerge as the next leader of the Conservative party and hence Prime Minister. Thirteen candidates have declared they will stand for the post, with Theresa May due to stand down on June 7th. A vote will be held amongst Tory MPs to whittle down the list to just two candidates who will go head to head in a postal ballot of conservative party members. The Conservatives are likely to vote for a new leader before the UK Parliament summer recess late in July.

There is a small risk of a general election. Some MPs in the Conservative party have said that they would prefer to vote against the government in a confidence vote than allow a no-deal to go through. In ordinary circumstances, it is doubtful that a general election will be called. With both the Conservative and Labour parties doing poorly in the EU elections and opinion polls, it is in neither of their interests to push for a vote. We doubt that the Ulster unionists, who prop up the Conservatives in government, will withdraw their support. Should an election be called it is highly likely that no one party would win a majority and that coalition government would have to be formed.

Clearly, all of the uncertainty has damaged UK growth, and confidence amongst consumers, industrialists and investors. The UK stock market has continued to lag the world: up 6.8% year-to-date versus 9.6% for the global index. The stock market’s yield of over 5% sets it apart from many other equity markets as being good long-term value. Sterling has dropped to a $1.26 from its previous trading range above $1.30.

Investors generally agree that UK assets are good value, but most struggle to see where the catalyst will come from to spur performance.

Yet all is not lost. There are means by which the outlook can improve. After a number of years of fiscal prudence, the government does have the scope to cut taxes or increase spending to stimulate the economy. The government has been reducing its debt levels for nine years and now has the scope should it wish to stimulate the economy should it want to. We and the market expect the Monetary Policy Committee to leave interest rates unchanged for the balance of the year.

We continue to encourage investors to ensure their financial planning investment strategy is aligned with the risk they can tolerate. Please get in touch with your financial planner should you want to discuss further.

Julian Broom, Chief Investment Officer

This entry was posted on Monday, 3rd June 2019 at 11:40 am and is filed under Financial Planning, News. You can follow any responses to this entry through the RSS 2.0 feed.