Brexit - Is this the Endgame?

James Penn
October 7, 2019

With recent scenes in the House of Commons looking like something out of Venezuela, we at Capital International have updated our forecasts once again to reflect the current political volatility in the United Kingdom. We attach a slide showing scenario analysis of what could happen in the next few weeks in terms of likely UK political developments, with associated impacts on markets, and have adjusted the accompanying probabilities to reflect our thoughts on outcomes (anyone who has watched Newsnight in recent months, where pundits are invited to stick images of what they think will happen politically on a pinboard, will know what fun these are).

Brexit Scenario


The likelihood of an election in the next couple of months has grown significantly to 45% under our reckoning. Clearly the minority Conservative government wants one – the opposition have yet to comply though, and the government has as yet come nowhere near to getting the required number of votes to dissolve Parliament under the Fixed Term Parliament Act (under the Fixed Term Parliament Act two thirds of Parliament now has to vote for one, whereas previously the right lay in the Prime Minister’s hands).

Tempers are heated, opinions are boiling over, agreement and consensus are short on the ground, but there is at present no sign of any means of resolving this impasse.

Deal, or No Deal

Meanwhile, we believe that the chances of  a No Deal Brexit and an agreed Deal have dropped to about 10% each. No Deal seems to have been ruled out by recent legislation (the so-called Benn Bill), while getting agreement on a deal (given the previous one was voted down three times) looks almost impossible in the current fractious atmosphere.


The possibility of a ‘Unity Government’, led by someone like Ken Clarke or Harriet Harman, entrusted with the task of carrying the country through the October 31st Brexit deadline and asking the EU for an extension  (on the basis that Boris refuses to ask for it), has increased in our estimation – perhaps to 15%. Would a ‘Unity Government’ agree to an election as soon as the Brexit extension was granted, or would it plough on for the remaining two and a half years of the current Parliamentary term… Who knows?

Lame Duck

Meanwhile, the probability of Boris Johnson limping on as a ‘lame duck’ Prime Minister (unable to get his vote through, unable or suddenly, post-October, reluctant to call an election) have increased – perhaps to 15%.

Labour entryism?

Yes, a Corbyn-led Labour government still looks unlikely. But there is a growing sense that a Labour government (surprisingly) might be a better option for the markets than the current Conservative government (at least a ‘No Deal’-bent Conservative government). Think about it. There would be no ‘cliff edge’ and no sudden disruption to the economy. Trade would continue as before. Article 50 would be revoked, or there would be a second Brexit referendum in a year’s time, with the likelihood of Remain winning second time round.

But what about the threat of mass nationalisations that emerged at the time of the 2017 general election? Well, for a start Labour would probably be in government in a coalition with the Liberals, the SNP and independents, so to some extent would be hemmed in. There would be risks for certain sectors like transport, utilities, and the Royal Mail Group, but it might get stuck in the courts.

There is also Labour’s plan for ‘Inclusive Ownership Funds’, which will force companies to transfer 1% of their shares per annum into a workers’ fund to be distributed to workers, although any value over £500 per worker per year would be transferred to the government.

According to Clifford Chance this will cost investors £300bn in terms of dilution, with a cost to UK pension funds of £30bn. The lawyers say that the benefit to staff would probably be £1bn per annum, with most of the dividends going to the government.


While Boris has claimed he would rather be ‘dead in a ditch’ than seek a Brexit extension, the most likely outcome surely is Boris asking for the extension and then immediately (on October 19th) calling for an election. By then there will be no excuse for the opposition declining one or prevaricating. It would seem probable to us that Parliament agrees to one on the basis that politics is currently log-jammed, and it is simply impossible for any party in this environment to get its domestic agenda through.

How that election goes is anyone’s guess. The Tories will fight on a Brexit ticket, and will probably gain some Labour seats in the North and the Midlands, but will likely lose seats in the South to the Liberals, and in Scotland to the SNP. Some political polls have forecast the Conservatives getting a 100+ majority with only 30% of the votes, with the opposition split, but the polls showed similar outcomes for Mrs May ahead of the 2017 election and we all know how accurate they were. The Tories may have to deselect some of the 21 ‘rebels’ who had the whip taken away from them in September over the so-called Benn bill (which forced an extension on the government), and there is a danger that this could alienate some previously loyal Conservative voters.


Over on the other side of the Atlantic the political situation looks similarly precarious – with President Trump once again looking in danger of being impeached over the July conversation he had with the president of Ukraine, and with claims of a Whitehouse cover up over this phone call given the comments made about Democratic Presidential candidate Joe Biden’s son. And this comes only a matter of months after Trump had been given the carte blanche over a previous attempt to impeach him (in relation to tampering by foreign powers in the 2016 Presidential election).

Trump may be able to brush this one off like he has done before. On the other hand, the scandal may fester away for months with damaging consequences for the President, in rather the same manner that the Watergate scandal undermined President Nixon, eventually making his position untenable. This would not be good for stock markets, given the President’s pro-business policies and tax cuts have been a major factor in the ‘Trump Bump’ and the strong rally in equities we have seen since 2016.

Overall, the political situation still looks precarious in most places. Markets have rallied into the quarter end, with a good month in September.

But it remains very difficult to see where they go from here over the remainder of the year, and there could be further volatility ahead yet. We are roughly at the point in the year (early October 2018) when stocks began falling in their calamitous final quarter at the end of last year.

Things rarely replicate themselves in exactly the same way and, hopefully, there won’t be a repeat of that this time, but in the current political environment one can never be certain.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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