Industry comment on Theresa May’s historic defeat last night:
Catherine McGuinness, Policy Chair at the City of London Corporation: “Parliament’s decision to reject the Government’s deal means businesses across the UK will continue to face uncertainty regarding our relationship with the European Union.
“The Government must now urgently set out its ‘Plan B’ to ensure we can secure a deal locking in a legally binding transition before 29 March.
“Financial stability must not be jeopardised in a game of high-stakes political poker. Politicians across all parties should work together pragmatically to avoid a no-deal Brexit, which would be a hugely damaging outcome for households and businesses on both sides of the Channel.
“In the meantime, it is critical that EU regulators urgently address cliff-edge issues such as contract continuity and data flows. These are issues that could disrupt cross-border financial services and prevent firms from serving their customers. We need firm action, not just rhetoric, to deal with these issues in the coming days and weeks.”
Guy Harrington, CEO of specialist property lender Glenhawk: “This outcome is certainly better than the deal that was on offer, that’s for sure. The sooner it is taken off the table, the better. Hopefully any further negotiations with the EU will now be delayed, and ultimately Brexit cancelled.”
Laith Khalaf, Senior Analyst, Hargreaves Lansdown: ‘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.”
Nigel Green, chief executive of deVere Group: “It appears the British government is currently in brinkmanship mode.
“Mrs May says she is not ‘running down the clock’ to the deadline of 28th March, but in all likelihood she will be re-submitting her Brexit plan with only a few minor tweaks, and so taking up government and parliamentary time that could perhaps be spent exploring other options that can command more support from MPs. In all probability the government will seek an extension to Article 50.
“The longer the Brexit process is extended, the less chance of a no deal and greater chance there is of a second referendum that will reject Brexit, or a soft Brexit. This will please global financial markets and favour the pound and UK financial assets.
“Following the leader of the opposition Labour party, Jeremy Corbyn’s tabling of a vote of no confidence, there is greater chance of a general election. But in normal times this would spook the markets and have a directly negative impact (in the short-term at least) on the pound, the FTSE and UK financial assets generally.
“But these are not normal times, and the DUP and Conservative MPs who vote against the government’s Brexit bill are unlikely to vote against the government. A general election seems a low probability outcome.
“As the uncertainty rumbles on, portfolio diversification should remain the major strategy for investors.”
Eric Lonergan, fund manager at M&G Investments: “The relatively trivial response of sterling to the overwhelming rejection of May’s deal by parliament suggests to me that markets are not particularly troubled by Brexit. What exactly does this mean?
- The range of outcomes is relatively clear and not particularly traumatic: a no confidence vote, a suspension of Article 50, a Norway deal etc. The UK economy is already being affected by Brexit and is likely to remain so, but this is in the price of gilts and the exchange rate. No one expects the economy to surprise positively.
- The one scenario which poses a more material threat is a no deal exit. The consensus however is that this is one area where parliament is united in its opposition, so it is unlikely. Furthermore, I sense that fear over a no deal exit is now more muted. It is likely to be the worst of a set of economic scenarios, but not particularly calamitous.
“In conclusion, I think ongoing Brexit uncertainty acting as a drag on UK growth and depressing UK interest rates is accepted and likely. The market implications are therefore not particularly significant.
“A material change at this point would either be parliamentary legislation in support of an alternative, i.e. Norway, or a no deal exit. Neither looks likely, so stasis continues.”
David Zahn, Franklin Templeton Fixed Income Group’s head of European Fixed Income: “We have long argued that the best Brexit scenario would be a deal between the United Kingdom and the European Union (EU) governing post-divorce trade, and we continue to believe that. But after yesterday’s UK Parliamentary vote that seems all but impossible, given the tight timeline.
“UK Members of Parliament voted overwhelmingly to reject the withdrawal agreement proposed by Prime Minister Theresa May. The EU, however, has said it is not prepared to offer further concessions.
“Meanwhile, the clock continues to countdown towards the March 29 leaving date.
“As we see it there are only three possible options for the UK government to resolve the impasse.
- Rescind Article 50 and effectively call off Brexit
- Seek an extension to negotiations
- Accept a no-deal Hard Brexit
- Calling Off Brexit”
Calling Off Brexit
“Although a number of opinion polls recently have suggested that UK voters now favour remaining in the EU, there seems to be no majority in the UK House of Commons to reverse Brexit.
“If Article 50 were rescinded we’d foresee a very positive response from financial markets, both in the United Kingdom and across Europe. Bond markets would likely sell off, sterling would rally and UK equities would probably go up. But this seems to us the least likely option.”
Extending Negotiations
“The second option—extending negotiations—seems to us to be the most likely outcome. But it brings with it more uncertainty.
“Any extension has to be agreed unanimously by the other EU members. We’d expect some of them to seek particular concessions before agreeing. Plus, we’d question whether there’s enough time before March 29 to secure approval from 27 different parliaments.
“Some rumours from Brussels suggest any extension would be limited, perhaps only until the summer. The two sides have been negotiating for two years and haven’t reached an agreement, so we’d question how much a two-month extension would change things.
“In addition, we recognise that markets don’t like uncertainty; extending Article 50 prolongs the uncertainty.”
Hard Brexit
“We estimate the chances of no-deal Brexit at around 30% to 35% 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.”
Weaker Sterling Becomes More Attractive
“Many investors we encounter already think sterling is undervalued but are put off buying because of the uncertainty surrounding Brexit.
“A Hard Brexit would likely prompt a decline in sterling, but we think subsequently a lot of people would step in to buy it attracted by the even lower levels.”
WTO Trading Rules Apply
“Under a no-deal Brexit, the United Kingdom would be governed by World Trade Organization (WTO) trading rules, including WTO trade tariffs, which tend to be more onerous than tariffs in negotiated trade deals.
“However, the United Kingdom does have the option of not applying those tariffs on imported goods. The UK runs a large trade deficit with other countries, so post-Brexit it will be important to keep goods flowing in to avoid the shortages that some commentators are worried about.
“There’s no guarantee that removing import tariffs would be reciprocated by other trading partners, but it should maintain a flow of goods into the UK. Furthermore, any successful trade negotiation that the UK was able to complete would improve its trading conditions.
“For businesses, confirmation of a Hard Brexit would bring certainty. Exporters would have some certainty on the extent of tariffs to be levied on their goods. But we’d expect sterling to fall which should make their goods cheaper for overseas buyers and offer some support.
“The immediate response to confirmation of a Hard Brexit would likely be extremely negative: The Bank of England’s Monetary Policy Committee may respond.
“We would expect the central bank to err on the side of being more accommodative. It could even consider restarting its quantitative easing programme.”
The Impact on Europe
“One area that has received little consideration is the likely impact of Brexit on Europe.
“Of course, Brexit will impact the United Kingdom the most, but we estimate EU growth could be hit by around 0.2% to 0.3% in the event of a Hard Brexit. In aggregate that may not seem much, but when the EU is only growing at 1.5% to 2% that represents a more sizeable chunk.
“So we believe there would be a strong motivation for the EU to move towards more normalised trading relations more quickly.
Capping the Uncertainty
“Two and a half years ago, with all the options for a negotiated Brexit on the table, a Hard Brexit seemed to be the worst-case scenario.
“Now, markets may feel that it’s preferable to bring an end to the uncertainty and accept the short-term pain.”
Can Theresa May Hang on to Power?
“All through the Brexit saga, UK Prime Minister Theresa May has reiterated her intention to stay the course.
“Late last year she survived a challenge to her leadership from members of her own party and has insisted she would not resign even if she lost this week’s vote on her EU withdrawal proposals.
“The opposition Labour Party has now tabled a vote of no confidence in her government.
“Practically, we don’t see a change in UK prime minister making a significant difference to the situation. Absent an extension to the talks, we calculate there would be no time for May’s successor to renegotiate a fresh deal with Brussels.
“A new prime minister could unilaterally withdraw Article 50, effectively calling off Brexit, but we don’t see appetite for that from any of the leading contenders for the job.
“If May were to quit, markets would likely be quite skittish for some time, as investors wait for any news on the identity of a new leader, the possibility of a fresh general election and any last-ditch attempt at securing a deal.
“But in our final analysis, a change in leader is unlikely to make much difference to the direction of travel.”
David Roberts, co-manager on the Liontrust Strategic Bond fund: “Immediately post PM May’s defeat last night, sterling fell and UK equity futures dropped. Soon after though, markets surged higher. Global investors now believe the chances of a “hard” (in their mind) economically damaging Brexit have receded, expecting UK and Euro politicians to compromise on “plan B”. Markets, perhaps unlike voters, are ruled by the head, not the heart and again are stating that compromise, that working together, can bring benefits to all.
“Of course, as further proof of that, recent days have seen positive market returns based on an easing of tensions between China and the US. There is still a long way to go, but hopes of a mutually beneficial solution are growing. Perhaps something for May, Corbyn and dare I say Farage to think about?
“Perhaps we are remembering – a small share of a big pie is better than a large share of no pie?”
David Lafferty, Chief Market Strategist at Natixis Investment Managers: “The 230 vote loss for May’s deal highlights how weak the UK positioning was from the start – after two and half years of negotiations, it still produced a deal that almost nobody wanted. However, it is unlikely that May’s government will lose the confidence vote today if only because Tories don’t want the future of Brexit driven by Labour. From here, May will continue to press MPs, but it’s hard to fathom her pulling a new, amenable deal out of her hat in a week or two if she couldn’t produce one after two years.
“The EU remains frustrated that the UK can’t clarify its intentions. This should hardly be a surprise given how split the UK electorate is over the issue. This has been a circular firing squad from day one with Theresa May in the centre of it. After pulling the first vote in December, and then losing by a huge margin yesterday, we see how little space May has to operate in. There is virtually no common ground between what parliament will demand versus what Brussels will agree to.
“Our view since the referendum has been that a negotiated or soft Brexit would be difficult to achieve. Last night’s vote was just the next step confirming how weak the UK position has been throughout the negotiation. Perhaps at the margin some MPs will now reconsider how dire the situation is staring down the barrel of a March 29th deadline, but we think the chance of a deal passing in parliament now is less than 20%.
“May’s shrinking set of options include revoking article 50 – which she says she won’t do, calling for a 2nd referendum – which she won’t support, or crashing out of the EU without a deal – which she views as somewhere between reckless and disastrous.
“From our view, the most likely outcome is that May acquiesces and either delays or revokes article 50, effectively pushing the ‘pause button’ just before the train flies off the tracks. UK businesses and consumers should expect to live under continued uncertainty for quite a while longer. It is important to recognize that the Brexit referendum was about an ideal – a United Kingdom independent of the EU. So far, that ideal has not been matched by a realistic plan or process to deliver it. Until such a plan emerges, the withdrawal process will probably be put on hold.”
Guy Harrington, CEO of specialist property lender Glenhawk: “This outcome is certainly better than the deal that was on offer, that’s for sure. The sooner it is taken off the table, the better. Hopefully any further negotiations with the EU will now be delayed, and ultimately Brexit cancelled.”
Terence Moll, Chief Strategist, Seven Investment Management: “Theresa May suffered possibly the worst defeat of any Prime Minister over her Brexit deal last night and has once again been left fighting for survival following the vote of no confidence tabled against the Government.
“For investors, it means further uncertainty in the near-term, and it could mean a bumpy ride for both markets and Sterling in the coming weeks as the saga continues to unfold.
“Nonetheless, for long-term investors this volatility does provide opportunities to buy domestic stocks – which were already at a significant discount to other markets – at more attractive levels. Such an opportunity should not be overlooked by anyone with a longer time horizon than the next few months.”
Guy Ranawake, Investment Director, Infrastructure team, Ingenious, said: “Parliament’s decision will create continuing uncertainty on the future relationship of the UK with Europe. This has a knock-on impact on the attractiveness of the UK to both domestic and international investors, particularly for illiquid investments.
“It is unlikely though to have any immediate impact on commercial infrastructure operations; both internal infrastructure and the external infrastructure that is linked to Europe should continue to operate as normal at least through to March 29th and probably beyond, particularly as this vote means that it is now highly likely that the date of the UK’s departure from the EU will be pushed back if not indefinitely postponed.”
Tom Brown, Managing Director of Real Estate at Ingenious: “What started in June 2016 as a political and constitutional crisis has, with time, spread into the wider economy. In response investors seem to be biding their time and waiting for greater clarity before committing their cash. This is reflected in property markets where transaction volumes have reduced on account of a mismatch between vendors and purchasers’ expectations. In the longer term, the UK will quickly re-establish itself as an attractive place to invest once confidence returns to markets.
“What investors and business so urgently need is clarity for the longer term before markets can return to normal, which may be some time away. We’re sympathetic to those that think the Article 50 process should be extended to allow time for greater consensus to be reached on a cross party basis which will enable the UK to go back to the EU with a clearer account of what it wants. This now seems all but inevitable.”
Ben Lofthouse, Head of Global Equity Income, Janus Henderson Investors: “Prime Minister Theresa May’s Brexit deal was defeated by a massive 230 votes in the House of Commons last night with Members of Parliament voting 432 to 202 to reject the deal. The outcome, therefore, of how Brexit happens is still highly uncertain, despite the fact that the official deadline to leave on 29 March 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.”
