If you are being asked about the Brexit withdrawal agreement by any of your clients and what this might mean for them, then here is a handy summary of our view that you can share: Draft Brexit withdrawal agreement summary
On Wednesday 14th November 2018 UK Prime Minister Theresa May won cabinet backing to seek formal approval of the UK’s proposal for withdrawal from the European Union (EU) after announcing “My deal, no deal or no Brexit.” During the day Prime Minister May was hit by a raft of cabinet resignations. As the day panned out the prospect of a vote of no confidence in May increased, in turn increasing the likelihood of a no deal Brexit.
Michel Barnier, the EU’s chief Brexit negotiator, urged all sides to take responsibility and back the deal. “We still have a long road ahead of us.” French Finance Minister Bruno Le Maire slammed politicians and announced that Brexit was a “historical mistake.”
The proposed treaty:
Key provisions outline the future trading relationship, aim to settle Britain’s last payment to the EU, protect citizens’ rights and avoid a hard border between Ireland and Northern Ireland. Within the pages, there is also the possibility of extending the transition period.
The proposed treaty in numbers:
The 585-page withdrawal agreement was the result of intense negotiations that started 17 months ago. The agreement contains provisions for a 21-month transition period and the so-called divorce bill which is estimated at a minimum of £39 billion (EUR 45 billion/USD 50 billion) to cover all of the UK’s financial obligations to the EU.
What does this mean for investments?
The current deal aims to avoid a cliff-edge scenario, rather than drafting the future relationship between the EU and the UK. Market reactions will be linked to investors’ expectations of the eventual outcome. We are not aiming to predict the unpredictable but here are our initial thoughts.
The increased risk of Britain leaving with no deal has knocked sterling as investors moved into dollars and yen. If the bill is approved first time around by Parliament – which we believe is unlikely – or a second referendum is announced, sterling should rally. A vote of no confidence would probably send sterling weaker. The euro is also likely to weaken in a no deal scenario as macro prospects would weaken.
Sterling volatility will affect the FTSE 100 as it will reduce the value of crucial overseas earnings. A no-deal outcome is likely to be damaging for UK and European equities as it would impact the UK economy and, to a lesser extent, European earnings. Sterling weakness could benefit UK equities. After the 2016 referendum, we saw equities rise as the pound fell. If a deal is approved or a second referendum called, we could see the reverse effect for UK equities, with European equities unlikely to be affected.
So far there has been increased interest in UK government bonds, whereas European sovereign bond markets have been flat. The economic fallout and uncertainty from a potential ‘no deal’ or ‘hard Brexit’ could lead to weaker growth and lower inflation, which would be positive for UK bonds. However, this could be offset by the possibility that the UK might suffer debt downgrades from credit agencies.
The European budget
The UK will pay all its dues and liabilities including the ones which will go beyond the end of the transition period. This means the impact should be minimal as Brussels is seeking to increase the seven-year EU budget to approximately €1.25 trillion in a bid to preserve the union’s post-Brexit spending power. To put things in context: the EU budget currently represents less than 1% of the overall area GDP (i.e. EUR 160bn for a GDP of EUR 16.6 trillion in 2018).
- Markets have been anxious for a conclusion to the treaty talks and although this looked like a step in the right direction uncertainty remains. If anything, uncertainty is now arguably higher!
- A likely Brexit deal has near-term and longer-term implications for markets: we expect volatility as the process moves forward.
- Spreading your investments across a range of asset classes and fund managers will diversify your risk and could help to provide a less bumpy ride for you and your investments.
For a withdrawal deal to happen:
25th November 2018– A special summit of EU leaders will decide whether to formally approve the announced Brexit deal. It will also deliberate on the future of the EU/UK relationship.
Date unknown – If the EU approves her deal, Theresa May has to gain support for the treaty before the vote in the UK Parliament, but hopes for a deal before Christmas are fading fast.
21st January 2019 –The cut-off date for a Brexit deal to be presented to Parliament. If a withdrawal agreement is not reached, what is next? A second referendum, an extended period of Brexit negotiation or something else?
Date unknown –If the UK parliament approves a Brexit deal, the deal will need to be ratified by the European Parliament before ‘Brexit Day’.
29th March 2019 – ‘Brexit Day’: If Brexit is approved by all relevant parties the UK is expected to leave the European Union at 11 pm.
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