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Is this the Endgame for Brexit (or just another set of games)?

Ever alert to the changing political landscape, at Capital International we have done some further scenario analysis of what could happen in the next few weeks in terms of likely UK political developments, with associated impacts on markets.

(Anyone who has watched Newsnight in recent months, where pundits are regularly invited to stick images of what they think will happen politically on a pinboard, will know what fun these are).

We have revised the projections we made last week to come up with this:

Even in the space of a week much has changed, with some big shifts in the probabilities noted above.

The probability of an election, for example, has increased even further – perhaps to 40% – though at the time of writing the opposition has declined to approve one (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).

It still looks the most likely outcome – though who’s to say in a few weeks’ time the situation will have changed once again, and perhaps it will be the Tories who don’t want one?

The chances of a No Deal Brexit have experienced the biggest drop. Our image shows them at 30% but perhaps this has declined to 15% with the passing of the rebels’ bill.

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

This week we can perhaps introduce another possibility, which would be Boris resigning – reluctant to be forced to go to the European Summit in Brussels on October 17th to ask for another extension, he decides to stand down with his pride and principles intact – to be looked back upon in history as the Che Guevara of our times? One can’t see Boris wanting to go down as the shortest standing Prime Minister in UK history, but many stranger things have happened recently.

So we might update our overall probability set to: Corbyn government following a confidence vote – 5%, ‘unity government’ – 5%, Boris replaced by another Tory leader – 5%, election – 40%, Boris stays on after a delay to Brexit – 15%, No Deal – 15%, and Deal – 15%.

At the end of last week markets breathed an algorithmic sigh of relief that the No Deal option had been deferred, with a bounce in both the pound and government bond yields.

Alongside this there is a growing sense that a Labour government (yes, a Corbyn-led Labour government) 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 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.

But perhaps it never gets implemented, and turns out to be another election gimmick.

So where are we then in summary? Dangerously close to a technical recession, caused by negative Q3 growth after a negative Q2. Although we may avoid it, the political uncertainty is on a scale that we haven’t seen since the mid-1970s. The Bank of England may cut rates in the next few months (despite what they said about reserving this for a No Deal Brexit), but it’s difficult to see any resolution to the global trade war issue any time soon.

It doesn’t look great to be honest.

Thankfully the stock market these days generates 60-70% of its earnings overseas, so to some extent is impervious to this.


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.