Brexit - the debate continues

Whilst there’s continuing debate and discussion regarding Brexit there has been, arguably, a lack of tangible progress over the last few weeks despite a series of votes in the House of Commons in-between ongoing negotiations with the EU.  At Brown Shipley we continue to keep abreast of developments and make adjustments to our investment strategy if and when we feel this is appropriate.

What has happened recently?

• Delay Agreed. At the EU Leaders Summit last week a delay was agreed to Brexit, the 29 March has been in our diaries for nearly two years but the date has now changed. The UK will now leave on the 22 May if MPs have approved the prime ministers deal. However, if this isn’t approved the delay could be shorter, until the 12 April. It’s at this point that the UK must set out its next steps - a longer extension to accommodate this process, which could mean a second referendum or a new deal, or to leave the EU without a deal.

• ‘No Deal’ looking more unlikely. The prime minister recently said in the Commons that it would not have been appropriate for a no-deal to go ahead on 29 March because the Northern Ireland civil service do not have the powers to take necessary decisions in the event of a no deal. This would also mean powers being passed from Westminster to Northern Ireland.

• The House reasserting its authority. The indicative voting process was agreed by the Commons on Monday evening and will take place on Wednesday. MPs will try and find a majority in the Commons for an alternative to the government’s deal. It’s important to note that the result of these indicative votes will not be binding and any option to move forward would also require agreement from the EU. Nevertheless, it could provide a steer on which outcome is the preferred route and also act as a catalyst for some Eurosceptic MPs to support Theresa May if they fear this process will result in a softer or significantly delayed Brexit.

The consequences of the above may lead to a softer Brexit materialising as a majority option. The front runner in terms of indicative voting is for a ‘Common Market 2.0’ or a ‘Norway Plus arrangement’, which has cross-party support. This is also a smaller step into the unknown as these options would be closer to the existing relationship. However, this route does not solve the main sticking point being the Irish border. Other options to be tabled could include the ‘People’s Vote’ or a revoking of Article 50.

Meanwhile, frustrations build. Theresa May is under pressure and there were rumours at the weekend that time might be called. If the Commons now comes to an agreement which is not her Brexit strategy then that might lead to a change in prime minister. It’s not just inside Parliament that frustrations are building, the general public are having their say with over one million people marching in London at the weekend for a second referendum (the ‘People’s Vote’) and over five million voting to revoke Article 50 via an online government website.

How we are approaching this from an investment perspective

The threat of a no-deal continues to become less likely as detailed above. The fact that sterling has rallied from its lows in December is testament to this. May’s deal passing is likely to be taken positively by the markets, but a longer extension will also bring some relief. We have therefore taken the decision to reduce some of the safe-haven positions that we had in place via government bonds and exposure to the US dollar. We also feel more willing to take fixed income credit risk and have been reducing our Multi-Asset funds sensitivity to changes in interest rates. Finally, we have also added exposure to UK Smaller Companies again as valuations are at a more attractive level.

As well as being aware of Brexit developments, we are just as conscious of other global events and markets. Our portfolios are not only positioned in UK assets but globally to benefit from trends and growth outside domestic markets. We remain focussed on the bigger picture and delivering on client outcomes across our range of products and services.

Alex Brandreth

Deputy Chief Investment Officer

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