Head - EMEA Investment Strategy
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Despite risks of a no deal, we believe an agreement will be reached
UK Prime Minister May has been constrained by at least three substantial factors: her lack of a House of Commons majority; the UK business community increasingly demanding a confirmed transition period and regulatory clarity; and the need to avoid a hard border on the island of Ireland as well as between Britain and Ireland. Against that backdrop, the government’s recent white paper is imperfect, but still represents progress. We expect the EU to engage fully with the UK over the white paper and to accelerate the negotiations in the autumn.
While recognizing the risk of a breakdown and no deal, we think it is more likely that the two sides will reach an agreement. This agreement is likely to be a softer version of Brexit than was laid out in the recent UK government white paper. In particular, the UK business community and several of the EU-27 leaders would prefer this. During this period, UK assets are expected to stay range-bound, with rallies capped by elevated headline risk.
During the first quarter of 2019, parliamentary ratification of the deal could be problematic, both in continuing EU member states and, more significantly, within the UK. This is the period of greatest risk, with a failure to ratify as Brexit day nears on 29 March posing the risk of there being no transition period. While several scenarios are possible during this period, our view is that the deal will eventually receive ratification.
The post-EU period is potentially when the UK’s internal political risks as well economic challenges will be heightened. The long-term bull case for UK assets may require both a stable government as well as a long-term roadmap for rebuilding UK trading relationships