Michael’s Insights – Headaches and Questions… The Brexit Dilemma

Michael’s Insights – Headaches and Questions… The Brexit Dilemma

As 2018 draws to a close, one of the most prominent, confusing and contentious issues impacting global markets is the United Kingdom’s legal withdrawal from the European Union. A draft now exists and as every budding filmmaker,author or PhD student will attest, whenever you put pen to paper you can often find that everyone’s a critic. This week we have had two Cabinet Ministers resign alongside calls for a no confidence vote. Brexit Secretary Dominic Raab has resigned from the Cabinet citing flaws in the proposed deal draft “[The terms] would lead to an indefinite if not permanent situation where we’re locked into a regime with no say over the rules being applied, with no exit mechanism”. This political uncertainty has further lead to backbencher Jacob Rees-Mogg submitting a letter of no confidence regarding British Prime Minister Theresa May, citing “Not a proper Brexit” as a key cause. A vote on a potential leadership spill will be compulsory if 48 of these letters are written to chairman of the Tories’ backbench Sir Graham Brady.

The challenge for Theresa May is to carve out a deal that the Parliament of the United Kingdom can ratify. This involves reconciling a series of issues that have never been thrashed out by any member of the EU before. Not only are there tangible issues to resolve such as the movement of goods and services, another philosophical challenge is the mechanisms utilised to facilitate the divorce. These are debates with serious ramifications which lack precedent. Striking the balance that keeps the UK, EU and all member states happy is inevitably very tough. That Theresa May and her government are struggling to find consensus on this issue is unsurprising,particularly given the weakness of the Conservative government position as they rely on support from one party in Northern Ireland to reach a majority in Westminster.

The poorly received Brexit deal draft has significant issues centered around border protection in Northern Ireland, and a loosely proposed temporary customs agreement (TCA) in the territory. Northern Irish Democratic Unionist Party (DUP) leader Arlene Foster has stated her opposition to “A deal which weakens the union and hands control to Brussels rather than Parliament”. This climate of political uncertainty will likely continue in coming months, as the Brexit deadline of the 29th of March next year approaches.

With widespread dwindling confidence for the deal, a “no deal” Brexit is becoming an increasingly probable outcome. In order for a deal between the UK and EU to pass, it must be accepted by British Parliament as well as all 27 countries involved in the EU in December. This leaves very little wiggle room for the deal to passand be implemented, coming over a year and a half after initial action to leave the union took  place.

In the case of a “no deal” Brexit, the process of the UK leaving the European Union will take
place without the May government’s proposed 21 month transition period. The ramifications of this will be negative for both parties, with the UK immediately joining the WTO’s trade rules and hence being vulnerable to the EU’s external trade tariffs. This weakness in trade stance is likely to increase the prices of UK goods, as production inputs both rise in price and face delays coming across borders. Furthermore, UK business activity is likely to slow as the manufacturing industry shifts production into the EU to avoid these ongoing operational costs. The EU will similarly suffer the consequences of a “no deal” Brexit, as skilled UK labour potentially lose international qualifications, as well as the union no longer receiving the UK’s previous 13bn GBP annual contribution to their budget. Without an easing period into Brexit, consumer and businesses would be exposed to significant market volatility in the period following the 29th March next year.

In line with the British Pound’s long standing record of reacting adversely to uncertainty, widespread selloffs of the currency have led to a fall to 1.28 GBP/USD. The FTSE 100 has ended slightly higher yesterday, contrasting expectations of growth from a depreciated pound. Additionally the ISEQ fell 3.9%; the largest single-day drop in value since the Brexit vote more than two years ago. These market results are indicative of low UK investor confidence, as political uncertainty clouds expectations of EU exposed firms.

What this is all means in our region is a macro environment with structural challenges. Europe alone has an Italian budget crisis, youth unemployment in Spain, Portugal and Greece and an ECB that is theoretically committed to reducing aggressive asset purchases. Many political theorists are arguing that there are existential questions over the purpose of the EU into the next few decades. The EU is an economic powerhouse globally with the German

French and Italian economies but geopolitically it is fractured and weak. General George S Patton is remarked as questioning why US armed forces were needed to protect Europe after World War 2 when both regions draw upon similar populations and economies

As such, Brexit is a messy soap opera but also a boon for investors could feel priced out of quality domestic businesses. Our privilege is to monitor these developments and share the evidence that indicates an opportunity. So perhaps we should have sympathy for the dancing queen at Number 10 – her dilemmas are our chance to strike!

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