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Low life in high places

24th Jan 2019
Several clients have requested an update on our thoughts on Breggsit, so here goes for what it is worth.

Numerous commentators are trying to predict what will happen over the coming days and weeks, but the reality is that no one knows. We believe that, after a considered reflection on where we have got to, it all points to Brexit either being delayed, not happening at all, or watered down so much that you won’t be able to tell we’ve left. Of course, we may be completely wrong, but we do believe the most likely outcome as at today is that Brexit will be delayed for another few months by an extension to Article 50. After that, anything can happen except a ‘no deal’ Brexit. You will remember the story about the Persian philosopher, the Sultan of Bagdad and a talking horse.

The starting point for our conclusion of a delay to Article 50 is that the UK Establishment and the whole of EU are desperate for the UK not to leave. Why the EU’s financial and political troubles couldn’t be turned to our advantage in the negotiations goodness only knows, but it is, in our view, the case that there is no incentive for the EU to offer favourable terms or further concessions to the UK. There is also, undoubtedly, a fear within the EU that the UK leaving could be the trigger for others to look to exit and the rise of such feelings is evident in many EU states. The consequence of all this is that the deal on the table, agreed by the Prime Minister, is essentially the only deal available under the present Government.

There have been suggestions to negotiate a Norway Plus or Canada Plus Plus style deal. However, these are largely focused on trading relationships and any move to discuss that relationship first requires a withdrawal agreement with a backstop and other features which would not be dissimilar to that on offer today – and therefore equally likely to fail. It is also not clear that there is a majority view in the House of Commons that would support any particular variant of these trade relationships.

At its heart this highlights the other key aspect driving our overall conclusion. There is no clear view amongst Brexiteers – and there never has been – of what Brexit looks like or how it should be delivered. It is unclear that Brexiteers could coalesce around any one particular view and certainly not sufficiently within the confines of parliamentary arithmetic to reach a single agreed position. Also, Mrs May is quite capable of buying off her more Eurosceptic colleagues by promises of cabinet promotions, elevation to the House of Lords, or whatever.

So, let’s turn to the parliamentary process. After the colossal defeat of Theresa May’s deal, the opposition parties and the House of Commons more generally have a key role to play. We have to assume that that the EU will not offer any further substantive, legally binding concessions – and indeed the German government recently quashed a report suggesting it might do so.

The UK Government did win a rather meaningless no-confidence vote by virtue of those lovely people in the DUP but this has left us even more paralysed in a position where the Government has the confidence of the House so does not fall and yet cannot get its principal piece of business through the House. At the same time the House of Commons in a number of votes has indicated it will not accept a ‘no-deal’ outcome. It is clear that a number of senior cabinet ministers would not accept a ‘no-deal’ scenario and, as such, would resign if that became Government policy. The Government could not ultimately withstand this and would have to accept that a ‘no deal’ had to be avoided. The Government would then be in a position where it was unable to get the deal agreed through parliament, unable to secure any sufficiently meaningful variation to that deal, having to avoid no deal and yet continuing to have the confidence of the House of Commons.

Unable to secure a general election through a no-confidence vote, Labour policy is to then argue for a People’s Vote, completely different of course to a second referendum and this will potentially be the key tipping point. With SNP, Liberal Democrat and some Conservative backbench support, it is likely that a change of Labour policy to support a People’s Vote (which is already its policy in the event of being unable to force a general election) would make such calls irresistible. At this point the prime minister would argue that the people should accept her deal. It would then be a straight choice between leaving based on her deal or remaining in the EU. Since her deal is absolutely dreadful in so many ways, this so-called ‘People’s Vote’ could only go one way.

This new vote would be divisive across the country, damaging the trust between parliament and the people. However, in our view, the second referendum is now the only likely way of breaking through the impasse within the House of Commons. Here, as the final piece of the argument, is the nub of the problem of a second referendum. In the original referendum we were presented with a binary choice of Leave or Remain. There is only one version of Remain but there are multiple versions of what Leave means or how it might be delivered. A second referendum would likely put that single version of Leave – based on the prime minister’s deal which Theresa May and the EU both say is the best and only one available – to the people. If we still want to leave the EU then we have to vote to do so on the basis of that deal and, with a mandate from the people, parliament would have to support the deal at that stage.

We think the deadline for Article 50 will therefore have to be postponed to allow time for the second referendum. At that stage, the most likely outcome is we vote to Remain, as there will be enough people in the electorate who cannot support Theresa May’s deal. We believe the most likely consequence from there is that we stay in the EU. If our view comes to pass, the greatest irony will be that, because they could not agree on a single version of how to deliver Brexit or what Brexit entailed, the Brexiteers for all their passion will ultimately have lost the prize they coveted.

Others are now also coming to this conclusion – in recent days the prime minister’s own positioning of her deal has moved from being ‘this deal or no deal’ to ‘this deal or no Brexit’. Whatever the outcome, this will have a lasting impact on British politics and may end up in a fracturing of the traditional party structures and politics as we have known it. It has also undoubtedly made politics more divisive and this trait is now so evident in British politics and will take a long time to heal. Sorry to be melodramatic, but this is nothing less than a class war that will have consequences far wider and deeper than the Irish backstop, whatever that is.

The effect on markets of all these shenanigans may be more volatility in the short run but remember that the UK comprises less than 10% of world stock market capitalisation, so let’s not get too carried away. We have said right from the start in June 2016 when the Leave result was announced that, either way, Brexit will not have that much of a long term effect on your investments and we still believe that to be true. Up until now it has actually been mildly positive, as Sterling has fallen against other currencies and so the earnings of global companies as expressed in dollars have risen, leading to higher profits and share prices. So, in a nutshell, forget all about Brexit and stop watching Sky News on that widescreen TV in the lounge.

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