Investment Clock insights

Brexit Groundhog Day


Trevor Greetham 

1 February 2019

Once again Theresa May is heading for Brussels to negotiate a Brexit deal the EU has already rejected. Once again the country, Westminster and even the Cabinet are divided over next steps. Time is running short but, once again, it appears nothing has changed. It’s Brexit Groundhog Day. 
This Saturday, 2 February, is the day when according to folklore a small rodent named  Punxsutawney Phil emerges from his Pennsylvania home and determines whether there will be six more weeks of winter to endure. Urban dictionaries take their lead from the 1993 romantic comedy, defining Groundhog Day as a “repetitious succession of increasingly tedious events”. In the film, Bill Murray is a cynical weatherman doomed to repeat the worst day of his career over and over again.  
The Prime Minister must know how he felt. Can she succeed in getting the EU27 to rip up the withdrawal agreement she herself negotiated but ended up voting against? Will the Irish backstop she agreed to but now wants to water down prove an unavoidable sticking point or will some form of acceptable compromise be reached? Will Parliament take back control and explore other options, including a referendum with remaining in the EU as an option? No one knows. 
What is certain is that, unless something changes, the UK will be outside the European Union two months from now without a deal and without a transition period. This one’s going to be a real cliffhanger. 
Investors should ensure their portfolios are prepared for all possible outcomes from a No Deal exit to remaining in the EU on current terms. 
So far the sterling exchange rate versus the euro has been surprisingly stable (chart 1) but do not mistake this for a lack of interest on the part of foreign exchange traders. The pound could slump by 10% or more in a chaotic exit. It could rise a similar amount if Brexit is reversed, an option that is increasingly popular with the general public if not yet with their elected representatives (chart 2). The markets don’t know which way to jump.

Once again Theresa May is heading for Brussels to negotiate a Brexit deal the EU has already rejected. Once again the country, Westminster and even the Cabinet are divided over next steps. Time is running short but, once again, it appears nothing has changed. It’s Brexit Groundhog Day. 

This Saturday, 2 February, is the day when according to folklore a small rodent named  Punxsutawney Phil emerges from his Pennsylvania home and determines whether there will be six more weeks of winter to endure. Urban dictionaries take their lead from the 1993 romantic comedy, defining Groundhog Day as a “repetitious succession of increasingly tedious events”. In the film, Bill Murray is a cynical weatherman doomed to repeat the worst day of his career over and over again.  

The Prime Minister must know how he felt. Can she succeed in getting the EU27 to rip up the withdrawal agreement she herself negotiated but ended up voting against? Will the Irish backstop she agreed to but now wants to water down prove an unavoidable sticking point or will some form of acceptable compromise be reached? Will Parliament take back control and explore other options, including a referendum with remaining in the EU as an option? No one knows. 

What is certain is that, unless something changes, the UK will be outside the European Union two months from now without a deal and without a transition period. This one’s going to be a real cliff hanger. 

Investors should ensure their portfolios are prepared for all possible outcomes from a No Deal exit to remaining in the EU on current terms. 

So far the sterling exchange rate versus the euro has been surprisingly stable (chart 1) but do not mistake this for a lack of interest on the part of foreign exchange traders. The pound could slump by 10% or more in a chaotic exit. It could rise a similar amount if Brexit is reversed, an option that is increasingly popular with the general public if not yet with their elected representatives (chart 2). The markets don’t know which way to jump.

Chart 1 – Sterling Has Been Surprisingly Stable Vs Euro  

Source: Thomson Reuters Datastream as at 31/01/2019

Chart 2 - Public Opinion Supporting Brexit Continues To Weaken

Source: You Gov(https://whatukthinks.org/eu/questions/in-highsight-do-you-think-britain-was-right-or-wrong-to-vote-to-leave-the-eu/)

Investors with a low appetite for large swings in the value of their savings should avoid excessive foreign currency exposure, bearing in mind that companies making up the UK equity market earn most of their profits overseas. Sterling bonds and cash should feature heavily.  

Investors willing to take more risk may still wish to hedge their bets when it comes to Brexit. We believe it makes sense to balance equity exposure with domestic property as the two asset classes are likely to react in opposite ways to each other. Equity prices would jump in a disruptive Brexit that saw the pound decline on the foreign exchanges but such an outcome would be problematic for property. Likewise, property would see an upward revaluation if an unexpectedly close relationship with the EU is agreed but sterling strength would hamper returns from overseas equity holdings.

Hollywood’s Groundhog Day had a happy ending. Seemingly endless repetition allowed Bill Murray to overcome his cynicism, learn new skills and win over the romantic heroine. Perhaps Britain’s politicians will also find the strength to learn lessons, discard their party allegiances and act in the national interest. Roll credits. 

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.