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The impact of Britain’s Brexit drama

Q&A: What the heck are the British up to, and what does it mean for investors? Investment strategist Lars Skovgaard Andersen provides the answers after a dramatic week.

Brexit has meant long workdays for British politicians this week. Parliament voted down Prime Minister Theresa May’s latest deal with the EU on Tuesday – saying it was still not good enough. On Wednesday, MPs rejected a no-deal Brexit – for neither do British politicians wish to exit the EU without a transition agreement and wake up on 29 March to hard borders and tariffs. And lastly, on Thursday evening they voted to postpone Brexit – if the EU allows them, that is!

But where does that now leave Brexit and investors? We asked Danske Bank investment strategist Lars Skovgaard Andersen:

Are we any closer to a clarification of the UK’s divorce from the EU?

Both yes and no. The British have shown they do not wish to leave the EU without a transition agreement. They also accept they cannot secure an agreement by 29 March, the date that would otherwise mark the start of the transition period prior to the final farewell at the end of 2020. The British need more time to agree a deal with the EU and – not least – with themselves. So while the UK is still heading for the exit door, when the departure from the EU will happen is more uncertain than ever.

Lars Skovgaard Andersen

Investment strategist, Danske Bank 

What will happen now?
On Tuesday, British MPs will again vote on Theresa May’s proposal that they rejected this week. She is hoping this will put further pressure on MPs to accept her deal now they have acknowledged that, despite everything, they do not want a hard Brexit.

If the deal secures a majority, Theresa May will ask the EU for a short extension of the 29 March deadline to iron out the final details before the transition period comes into effect.

If May’s deal is rejected again, she will request a longer extension of the deadline from the EU, which would not be welcomed by Brexit hardliners. Should May ask for a postponement of one or more years, the Brexiteers’ worst fear would be that Brexit for one reason or another does not happen.

The EU meanwhile is scheduled to hold a summit on Wednesday and Thursday next week, and a natural subject of discussion would be their willingness to grant the UK an extension of the deadline. Note that all remaining 27 EU members need to back the idea, and while we expect this will be the case, it adds a further element of uncertainty to the circus.

What do you expect will happen?
Our main scenario is that the British will eventually opt for a solution closely resembling Theresa May’s proposal. Assuming the UK is granted an extension, they will have to agree a new deal for the transition period, though British consensus on a deal would be irrelevant if the EU does not accept it – and would simply delay the issue even further.

What does Brexit uncertainty mean for investments?
Brexit uncertainty is one reason why European equities have not been among investors’ favourites in the past year and are therefore relatively cheap.

Naturally, our hope is that the fog of uncertainty clears soon; otherwise, the next best outcome would be the issue getting kicked so far into the future that political jitters ease for now. This would allow the focus to shift to other things, such as China’s ongoing efforts to stimulate its economy, which could positively impact Europe’s economy and business confidence, as Chinese demand for European exports might increase. This is also one of the reasons why we are currently overweighting European equities in our portfolios. 

Looking at the bigger picture, however, Brexit uncertainty should not mean that much for your investments so long as you have the right combination of equities and bonds in your portfolio relative to your finances, risk appetite and investment horizon. Brexit developments should not cause any undue concern. 

That is our position at Danske Bank, and despite the various uncertainties pervading the market at the moment, such as Brexit and the China-US trade war, we see a greater return potential in equities than in bonds during the rest of 2019.

This content is not investment advice - you should always speak to an advisor about how a possible investment matches your investment profile before making an investment.