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Brexit – Deal or no deal?

27 November 2018

Brexit is due to be delivered in March 2019, but it is still not clear exactly what form this will take. GAM Investments’ Charles Hepworth looks at the most likely scenarios.

Now we have the first stage of the finalised agreement on the Brexit deal it is worth considering the likely outcomes, as in our view there are a few hurdles to still get through – some of them more likely than others.

The first point is that while the deal has been signed off by the 27 EU countries, it still needs to be approved by the UK parliament, which at the moment is an each way bet. If it is going to go through we believe there are currently only two ways this could happen:

1) the European Research Group (led by Jacob Rees-Mogg) would have to win some concessions / amendments to the current draft deal that are more in keeping with their desire for the UK to be unshackled from the EU and resulting in a hard-ish Brexit.

2) enough Labour remain-supporting MPs break with party lines and vote with Prime Minister May to approve the current deal, thus ensuring a soft-ish Brexit.

In our view the probabilities on both of these two together – SOAB (Sort of a Brexit) – are probably somewhere now around 20% (down from the 30% stated previously).

Our other scenarios are based around the prospect of parliament voting against the deal – which we believe would increase the likelihood of a second bite at a referendum. It is worth noting that at this point neither of the main political parties want to categorically and publicly support having a second referendum as to do so would make it a fait accompli. Current polls suggest this would favour a remain outcome, but then again they did in the first referendum. However we feel the prospect of a recession-inducing cliff-edge outcome would scare some flip-flopping Brexiteers, who may not have really understood the original question, into voting to remain.

We believe there is roughly a 30% chance of staging a second referendum (ie if the current deal is not agreed by the EU and / or it does not get through UK parliament). However, in our view the likelihood of a no Brexit / remain outcome is lower than a hard Brexit with no deal (which incorporates another leave outcome on a second referendum and / or the government pushing for that outcome if no agreement is reached with the EU). In summary, we are forecasting a 15%ish probability for a no Brexit / remain outcome and 25% for a hard Brexit with no deal (down from 35% stated previously).

One other eventuality has now emerged that we did not include last time: a transition extension that goes on ad infinitum. In this scenario the deal is agreed, but not in time for the March next year deadline, therefore the EU commission grants extension after extension and the current status quo effectively remains in place. It is the Hotel California scenario – the UK has checked out but can never leave. We believe this could be the only way the EU could halt a damaging hard Brexit if things appear to be heading in that direction and one which ultimately would inflict economic pain on the EU as well. This is currently our lowest probability for the end state of Brexit – BINO (Brexit in name only); one that the EU could have used as its trump card and wait out until the UK electorate is pacified into remaining, but that ship now looks like it has sailed.

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The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. Allocations and holdings are subject to change. Reference to a specific security is not a recommendation to buy or sell that security.
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