Theresa May’s Brexit deal was resoundingly defeated at the second attempt in the House of Commons last night. Despite the government’s efforts over the past weeks, the deal lost by 391 votes to 242. This represents an increase in support of only 40 MPs compared to the government’s historic loss in January. In addition, 75 Conservative MPs and all 10 Northern Irish DUP MPs voted against the deal.
Events will now move quickly as other options get examined in the coming days. In the aftermath of the vote, Theresa May committed to a free vote on Wednesday on a No Deal Brexit. If this is defeated, as is strongly expected, there will be a vote on Thursday on applying for an extension to Article 50. It seems that there is a significant majority in the House of Commons in favour of an extension at this point.
If the extension vote passes it appears likely that the government will ask for a short extension of just a couple of months, thereby avoiding running into the European Parliament elections at the end of May. Hence, few expect the EU to reject the government’s request, even though all 27 member countries have to agree.
The votes over the upcoming days, in particular on the extension, help to mitigate the imminent risk of a No Deal Brexit. To an extent the failure of last night’s deal was expected so sterling has not fallen dramatically (continuing to trade around $1.31) and equity markets are also relatively stable.
On Monday sterling had rallied as hopes of an agreement increased, while Theresa May travelled to Strasbourg in order to seek out last minute concessions from the EU. It seemed the chance of success had increased after the EU provided certain legal assurances that the UK would not become trapped in a customs union against its will. However, the revised legal advice from Attorney General Geoffrey Cox indicated that the new amendments did not bring about a material legal change to the risk of the UK being indefinitely trapped in the Northern Ireland backstop. This meant that the concessions were not enough to win over the support of the Conservative pro-Brexit European Research Group or the DUP, and this was reflected in last night’s vote.
A reduced probability of a No Deal Brexit is a positive for sterling and risk assets. Therefore, positioning within the SVS Brown Shipley funds has been managed accordingly, although the risks have not completely disappeared. Within the Multi-Asset funds we have reduced overseas currency exposure, increased corporate bond allocations by reducing traditional safe-haven government bonds, and added higher risk equity exposure by increasing UK Smaller Companies. In the Sterling Bond fund we are looking to protect the fund from an increase in bond yields and have reduced the duration.
As events unfold this week we will continue to keep you updated.
Toby Vaughan
Chief Investment Officer
