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Brexit: Uncertainty remains

27 February 2019

GAM Investments’ Charles Hepworth provides his take on the latest developments in the ever changing Brexit situation and highlights the possible outcomes.

My view on Brexit has not changed.

The issues are less changing facts (which have remained fairly static) but more bi-polar political leadership. Sterling has risen to an interim high following the news Jeremy Corbyn will support a second Brexit referendum after all and that Theresa May will allow a vote to delay the March deadline in an effort to avoid a hard no deal exit. These about turns come as both party leaders try to calm their increasingly restless MPs and is political expediency at its finest. For Corbyn, as a confirmed Brexiteer, this must come as a painful climbdown and a galling one for him knowing that he had to appease party members who were becoming increasingly concerned over the party’s direction and looking to break away to the newly formed Independent Group.

For May, delaying again with just 23 parliamentary working days to sort the end state of the exit from the EU, there is still no guarantee one way or the other what is going to happen. No deal, however, must be the most unlikely outcome, given the complete lack of parliamentary support for it. But May’s deal also does not look likely in its current form. Both the EU and May are essentially running down the clock to the final vote. She will be hoping those who voted against her in her first attempt to pass the original deal through Parliament may be spooked that with so little time left they will have to support her original deal. Suggesting, as she is now, that there must be a delay of a few months past the deadline will infuriate the hardline Tory Brexiteers. Cynically you could argue she is dangling this delay ‘sword’ over them as an incentive to the European Research Group (ERG) members to fall in line with her deal. It is unclear what a two month delay would achieve, in any case, when so many months have passed already with no progress.

It is a supremely high stakes game of chicken she is playing with both the EU and the UK Parliament. She promised two weeks ago to allow a final vote on her deal this week, but then decided to go back on that promise at the weekend – delaying this final vote until just 17 days before the March deadline. This is a dangerous strategy, if that is what it is – it is perhaps more like a shifting game of Jenga at a continental-sized level. Einstein’s definition of lunacy was to keep doing the same thing over and over again and expecting a different result and that appears to be exactly what May is doing. However, delaying the March deadline and trying again would not be beyond the realms of the lunacy we have seen so far in Parliament. There is now a small but growing chance of a “People’s vote” option – I am undecided on whether that ship has fully sailed, even as the prediction markets only ascribe a 33% probability to it (Source: Bloomberg, Oddschecker).

Right now it seems that delaying, or at least threatening to delay, until her deal is forced through Parliament is the most likely option. Sterling might have jumped to very short-term highs recently but my sense is that it is not fully buying a deal yet; more buying the likelihood of delay. It feels in the short term that this 10 day bounce looks overdone. Therefore until there is something concrete to form a view around, we are not taking a position in sterling but instead keeping our currency hedging exposure 50/50 to protect the strategies as much as we can whatever the outcome. If the deal is agreed through Parliament then sterling could move another few percent higher in the short term but ultimately would likely drift back as the country’s economic uncertainty would be the next driver of sterling’s fortunes. We think a second referendum would see a much higher move up as Remain odds (apparently) still have the march on Leave.

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