With no clear path for Brexit, expect more volatility in Britain’s markets
- Recent parliamentary debacles show Britain has reason to doubt Boris Johnson’s promise of a clean break from the EU
- Though loath to renegotiate the deal any further, it might be in Europe’s best interest to let London buy more time
As of this writing, the pound was under renewed pressure from these growing no-deal jitters, with the currency on track for its worst month since October 2016.
Despite the prime minister’s determination, the public remain sceptical.
In a YouGov poll in mid-July, 56 per cent of respondents said they believed Britain was either “not very likely” or “not at all likely” to leave the EU on October 31, versus 27 per cent who said leaving on time was either “very likely”, or “fairly likely”.
That said, there is no consensus on what form Brexit should take, either. This was why Theresa May’s deal was rejected three times, leading to her resignation.
Hence, this provides some comfort that there are safety measures preventing Britain breaking away from the EU with no deal by default, but not a path to resolve the deadlock.
A general election or a second referendum is unlikely to resolve the stalemate, either.
The European parliamentary elections in May showed that British voters are linking their support to a particular political party with their view on Brexit.
Public opinion remains divided on the issue. Another YouGov poll conducted in late May shows that 46 per cent of respondents choose remaining in the EU as their most preferred outcome, while 32 per cent choose a no-deal Brexit as their top choice.
This has prompted a decline in support for the Conservative and Labour parties, and a rise for the Brexit party and pro-remain Liberal Democrats.
Why a post-Brexit ‘Boris boom’ may not be a fantasy
This implies no one single party would gain a majority if a general election were held. Predicting whether the ruling coalition would be pro-remain or pro-Brexit is probably a coin-toss.
Although EU leaders have made their stance clear, it may ultimately prove logical to give the new prime minister a little more time to reach a consensus, if only to avoid a potentially negative economic impact on the rest of Europe.
While nothing is certain, it is most likely that Britain ultimately leaves the EU but remains in a customs union for goods.
This would require deadline extensions and perhaps more drama than the political satire Yes, Prime Minister. Hence, we should expect more volatility for the British equity, fixed income and currency markets in the months ahead.
Economics or culture: what’s driving the US and Europe’s populist wave?
At the same time, it is important to recognise that political and policy risks and financial assets do not necessarily follow a simple one-for-one relationship.
For example, Brexit has been a negative for sterling and domestically focused companies, but it has been positive for British government bonds, given the rising possibility of interest rate cuts.
Moreover, a weaker pound has boosted repatriated earnings for large-cap international companies, creating a flattering impact on corporate balance sheets.
Johnson must silence doubters and resolve impasse over Brexit
For Asian investors, the good news is that the direct economic impact to Asia is likely to be limited.
The bad news is that this would join other global economic issues weighing on global investment sentiment, such as rising protectionism, slowing corporate investment and a limited set of policy tools to deal with the next downturn.
Tai Hui is chief market strategist, Asia Pacific, at JP Morgan Asset Management
