BREXIT – What’s next?

In the first scenario, Theresa May succeeds in persuading Parliament and the result of Tuesday’s vote is positive. Acceptance of the new agreement lifts uncertainty on the Brexit outcome and allays investor fears, restoring their appetite for risk and the prestige of European equities.. The markets would clearly respond vigorously to this situation and at the same time, assets regarded as a safe haven, such as German government bonds, would drop in value.

In the second case, Parliament expresses its disagreement, and nothing is voted before 29 March 2019: the UK finds itself sucked into a downward spiral of leaving the European Union without an agreement. In other words, this is a “hard Brexit” - difficult to quantify the resulting economic and commercial repercussions. In contrast we could expect to see a disenchantment with UK equities, especially export stocks, that will obviously be affected, without however being alone in suffering from the knock-on effect of this situation, which will inevitably spread to other European stock exchanges. Against this backdrop, investors would lose their appetite for risk, rates would fall and pull down the sovereign bond market in their wake, not forgetting that European equities would suffer more than their US equivalents. A decision would therefore be called for: a return to quality investments.

Indeed, the law stipulates that the government has 3 days to indicate what it intends to do, which will probably involve asking for new negotiations in order to reach a better agreement. This scenario is the one that will give political leaders the opportunity to explain themselves and show their willingness to return once more to the negotiating table. In fact, the Labour party leader, Jeremy Corbyn, has already announced that he was not against this. For its part, the European Union should also show a more conciliatory approach, even if its credibility may suffer and it could find itself reproached for its lack of activity. In this case, if each side makes time its best ally, the European parliamentary elections would then be taking place during any such extensions: the UK would therefore be involved in the voting process which might well be an embarrassing situation. While this scenario has the merit of being less apocalyptic than the previous one, it deprives investors of a clear and well-defined outcome and, as a result, is likely to generate more uncertainty on the markets.