We had been cautiously optimistic before the details of the withdrawal agreement were announced. However, despite initially receiving agreement from her Cabinet, it does appear that the the Government will find it difficult to get this agreement through Parliament.
The next step in the process is the EU Summit scheduled for 25 November, where member states are expected to ratify the withdrawal agreement that has been reached. After that, the final version of the agreement comes back to the UK parliament for a vote sometime in early December.
Going forward, there is a growing risk of a no-confidence vote against Theresa May and a risk of a vote of no-confidence in the government as a whole. Should either transpire, the resulting political turmoil would make it unclear whether the UK is heading towards getting a better deal, no deal, or whether there is a chance of no Brexit at all, each of which have different implications for the value of sterling.
What it means for investors
Any major development in Brexit negotiations is reflected in the value of sterling. This influences large companies differently to small companies, as the big international firms make lots of their money in dollars, euros and yuan.
What happens now, very much depends on whether there is a challenge to Theresa May or the government. Either one could see sterling fall in the short term. Although a general election would raise the prospect of a Labour government that might be positive for sterling, but most probably negative for UK equities.
If the withdrawal agreement does reach the stage of being voted upon:
- Scenario 1: parliament accepts the deal, it will mean less but continued uncertainty as we will still not be clear on the future relationship. Consequently we thinks sterling could rally to some degree.
- Scenario 2: parliament rejects the deal, there will be massive uncertainty of whether the UK is heading towards getting a better deal, no deal, or whether there is a chance of no Brexit at all. In this case, we think sterling would come under pressure in the short term.
On balance, our view remains unchanged at this point. We think the chance of sterling rallying strongly is weaker than the chance of it holding similar value or falling.
Sterling and UK equities are likely to be volatile while we progress through this political uncertainty. It is for this reason we had prepared clients’ portfolios by increasing allocation to larger companies that have foreign earnings to benefit from a weak sterling. Meanwhile, we have maintained some exposure to the smaller, more domestically exposed companies for the possibility of a smooth exit or indeed no exit at all.
For more information or if you have questions about your investments, please speak to your usual EQ contact or get in touch by calling 020 7488 7110 or emailing email@example.com.