As expected, the House of Commons has voted against the government’s Brexit proposal. What was unexpected was the margin of defeat which has, in essence, forced the government to enter into cross-party discussions over what proposal Parliament should next vote on. In the meantime, the Labour party has proposed a no-confidence vote in the government which is likely to be voted on at 19:00 GMT today.
The robustness of sterling in the wake of the vote outcome indicates that the market thinks that the more likely eventual outcome is for the UK to remain in the EU. Recent opinion polls have suggested that if put to a second referendum, the result is more likely to be a majority in favour of remaining in the EU than leaving. A recent YouGov poll showed a majority of 46%-39% would vote in favour of remaining with the balance of those polled expressing no opinion.
It is thought very unlikely that a no-confidence vote will be carried. Hence the next substantive decision in Parliament will be the vote on the way forward with EU membership to be held on Monday:
• Parliament decides to call a second referendum. The market will immediately assume that the UK electorate will vote to stay in. Market impact – we would expect a marked rally in sterling and a significant rally in the equity market. UK sterling has underperformed other currency markets relative to the dollar by about 12 percentage points since the middle of 2016. If we assume that the underperformance was primarily due to the overhang of Brexit the rebound could be very rapid. Bear in mind that should the UK recommit to the EU this would lay to rest all of the noise about the UK’s membership of the EU that has dogged UK politics for the past two decades. The UK could benefit from renewed capital inflows and a rebound of confidence amongst consumers and industrialists.
• Parliament votes for a new proposed Brexit plan to take to the EU. Theresa May or a potentially new Prime Minister would have to go back to the EU to negotiate based on what Parliament has voted for.
• Hard Brexit happens by default. At this stage, this looks like an improbable outcome. Although some leading politicians are making the argument for such an outcome
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.
Global Head of Advice