Finally, Britain’s House of Commons (HoC) will vote on the divorce deal with the European Union (EU), today at 19:00 local time. Prime Minister (PM) Theresa May postponed the vote, originally set for 11 December, due to its lack of support in parliament. Conservative ‘Brexiteers’ criticise the Ireland backstop clause and prefer a no-deal Brexit over May’s deal. The opposition Labour party wants to sink the deal to weaken the Conservatives’ leadership further, which could offer them the opportunity to take power and provoke a softer Brexit, or abort it. By delaying the vote, PM May had hoped to gain time to coerce the EU into amendments to the backstop clause, in order to gain more support for the deal. However, the EU delivered no such gifts over the holiday season, and the deal stands as is.
Analysts at Julius Baer believe that the withdrawal deal is still set to fail in the HoC vote:
A sunk deal could mean the end of May’s career as PM, as she might step down afterwards, while the opposition threatens a parliamentary no-confidence motion. Despite the possible political havoc after Tuesday’s vote, a failed deal will not inevitably lead to the hard no-deal Brexit that many fear. According to the UK’s Withdrawal Act, as of 21 January, parliament can influence the government’s Brexit plans.
Therefore, an alliance seeking a softer Brexit, or to abort Brexit, optionally using a second referendum, may take control of the process. Before this happens, as a first step, an extension of Article 50 (delaying the exit date) is likely, in order to gain time to sort out the background politics. Ironically, the Conservatives’ disagreement over the withdrawal deal could lead to the outcome that no Brexit takes place at all.
The firm’s short-term pound sterling outlook is Bearish, reflecting risks that political turmoil after Tuesday will increase volatility. In the long term, the experts hold a Bullish outlook, as a deal, a softer Brexit or a process leading to an aborted Brexit, would improve sentiment from where it currently stands. A hard no-deal Brexit is the tail risk to consider.
We recently upgraded UK equities to Neutral, as the risk of a hard Brexit seems adequately priced in. UK equities may benefit from attractive valuations and improving earnings growth dynamics, if a no-deal Brexit can be avoided.