Outlook & commentary
Brexit - going through the motions
On 15 January, UK prime minister Theresa May suffered a resounding parliamentary defeat on her EU withdrawal bill. An unsettled couple of weeks now lie ahead.
On 15 January, UK prime minister Theresa May suffered a resounding parliamentary defeat on her EU withdrawal bill, with 432 MPs voting against the bill (including 118 of her own MPs) versus 202 in favour. The bill set out the terms of the UK’s exit from the EU on 29 March, beginning a 21-month transition period during which a trade deal could be agreed.
An unsettled couple of weeks now lie ahead. In response to the vote, the leader of the opposition, Jeremy Corbyn, tabled a vote of no confidence, potentially triggering a general election. We think it unlikely that this motion will succeed.
Per the amendment tabled by Conservative MP Dominic Grieve, Mrs May has until 21 January to return to parliament with a “Plan B”.
The sheer scale of Mrs May’s defeat underlines once more the deep divide among MPs and suggests that achieving a majority for a deal in a potential second vote will remain very challenging – unless we see material concessions by the EU or changes in the government’s position.
Realistically, there’s limited scope for substantive concessions from the EU, aside from cosmetic tweaks to the non-legally binding declaration on the future partnership. For example, the EU could come up with further non-binding “clarifications” on how to work on customs processing systems for Ireland within a given time frame.
Meanwhile, the Brexit clock is ticking fast, with little more than 70 days until the UK is due to leave the EU. It is hard to see what can be achieved within the current Brexit timetable. As such, the prospect of an extension of the 29 March deadline has risen.
The Commons defeat suffered by Mrs. May could give her an opportunity to change tack, and she has pledged cross-party talks ahead of a second parliamentary vote. Similarly, the likely defeat of Mr Corbyn’s no confidence motion may cause him to move to a new position. Whether he would push for a second referendum thereafter remains a point of speculation.
Against this backdrop, we think an extension to the March 29 deadline is the more likely of potential outcomes. The main question is the basis on which the EU agrees to this extension.
While a “no-deal Brexit” remains a potential outcome, the operational hurdles for a “crashing out” on 29 March have risen following (i) the European Court of Justice ruling that the UK can unilaterally revoke Article 50 and (ii) a parliamentary vote giving MPs more control over negotiations.
- Uncertainty persists. Even if a “cliff-edge” scenario is avoided, uncertainty will persist given that any agreed withdrawal deal will merely set the scene for the future trade relationship. Therefore, investors and companies need to prepare for a wide range of scenarios.
- The impact of Brexit will be uneven. Whatever the ultimate Brexit “end state”, more frictions in trade with Europe seem unavoidable. This will affect EU member states, the UK and its various sectors differently. For the UK, time and active trade policies are necessary to mitigate some losses from higher restrictions to EU trade, but this may not offset them completely.
- Brexit entails a bumpy ride for UK assets. But the UK stock market is not the UK economy. Seventy percent of FTSE 100 revenues are generated overseas. The dichotomy between internationally and domestically oriented UK stocks might well continue.
Europe’s economic slowdown makes the proposed normalisation of ECB monetary policy harder
The European Central Bank’s gradual normalisation of its monetary policy should continue, but the economic slowdown in the euro-zone will likely delay any rate increases, and the window of opportunity is becoming increasingly narrow.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).