6 Brexit outcomes

by: , Portfolio Strategist, New York Life Investment Management

On Tuesday December 11th members of British Parliament are expected to vote on the European Union withdrawal agreement only 108 days before the divorce by default on March 29, 2019. If the current agreement passes, more official votes by the United Kingdom (UK) and European Union (EU) parliaments will take place between January and March of 2019. Trade talks would follow shortly thereafter.

The proposed agreement faces harsh criticism from both sides. Politicians opposed to leaving the EU (Remainers) are concerned that the deal will too significantly increase the barriers between the UK and the EU, while those in favor of Brexit (Brexiteers) find the agreement too soft, instead calling for a more decisive break from the EU. Given these criticisms, we believe the deal is unlikely to pass at this time. If the government loses, five other potential outcomes loom for the UK:

  1. A second round of debate followed by a second vote with parliament
  2. A new withdrawal agreement
  3. A ‘no-deal’ Brexit
  4. A second referendum
  5. A general election

A failed agreement most likely sets the stage for several weeks of more negotiations – with the onus to fall on Theresa May and her administration to revive the deal in short order. What a second attempt looks like, and the likelihood of its success is unknown.

If renegotiations or a second attempt subsequently fails, the UK faces a difficult internal political struggle. Some key figureheads and institutions like Tony Blair, a former Prime Minister, and The Independent, a British newspaper, have called for a second referendum. Others have called for a vote of no confidence – which could lead to a new general election, a new ruling party, and a new prime minister.

Political, Economic, and Market Impact

Tuesday’s vote will likely fail to reduce political uncertainty in the UK. And unfortunately, a failure to resolve this political uncertainty may lead to some worst-case scenarios for the UK economy – namely a (1) general election or a (2) ‘no-deal’ Brexit.

  1. As it stands, a likely frontrunner for prime minister is Jeremy Corbyn. His election, should it happen, could prompt substantial market volatility. Corbyn supports economic policy, including nationalization of some industries, which could be worse for financial markets in the UK than even Brexit.
  2. An unmanaged ’no-deal‘ Brexit elicits the second harshest of scenarios for the UK. The Bank of England warned that this scenario could reduce the UK economy about 8% in one year. We consider this scenario to be unlikely. More likely, is an “orderly” or “managed” no deal, where the UK exits with several temporary side agreements protecting the flow of goods and limiting the risks to financial markets.

Any Brexit scenario impacts the UK economy and asset prices more than the euro area or the rest of the world. The British pound would weaken along with trade, and British equity markets would likely decline with export-focused companies most at risk. Brexit may also drag on the broader European economy in the months ahead as the UK stumbles toward an outcome.

Bottom Line

No one knows for sure what will happen in the UK over the coming months, but the risk of a hard Brexit looms. January 21, 2019 is our ‘no-deal’ benchmark. If no deal has been made by this time, the UK must set forth a procedural plan. Ultimately, we think any Brexit scenario is bearish for markets in the short term, with disproportionate impact to UK markets and export-focused industries. However, over the longer term, businesses and consumers are likely to adjust to new trade arrangements and rule-setting.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, New York 10010, provides investment advisory products and services. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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