Managing the rising risk of a no-deal Brexit: Global Britain or Little England?

Invesco’s Global Market Strategy Office analyses a range of Brexit scenarios: No-Deal risk is high and rising; early elections are possible but may not prevent a no-deal Brexit on 31 October and the UK itself may eventually split. Uncertainty will continue to depress UK growth, gilt yields and sterling. We prefer non-UK assets, including UK equities exposed to overseas earnings.

Summary

• The new, now twice-extended Brexit drop-dead date is 31 October 2019; and further delays are possible to accommodate an early general election.
• The risk of an eventual no-deal Brexit is rising by the day and divining the implications of Brexit is crucial for both the UK economy and financial markets, the Eurozone (EZ) and the wider world, in our view.
• New Deal or No Deal!? The UK’s approach to Brexit has changed radically under new PM Boris Johnson. He is shifting both the domestic discourse and dialogue with the EU from tweaking the existing deal that repeatedly failed in Westminster, toward a fundamental reboot. By making new negotiations contingent on re-opening the Withdrawal Agreement to remove the Irish “Backstop” (an insurance policy to avoid the re-emergence of a national “hard border” on the island of Ireland) – a non-starter for the EU – he risks a no-deal Brexit.
• The odds of an early election are rising sharply because of Johnson’s wafer-thin majority in Parliament and resistance in Westminster to a no-deal outcome. We would expect the EU to accede to any UK request to further delay the Brexit deadline to accommodate an early election, in the hope of a new UK approach. However, it is possible that the election would occur after the UK leaves the EU on 31 October.
• Any campaign during a pre-Brexit election would be fought primarily on the battleground of Brexit, today’s defining UK political issue. It could also prove to be an existential risk to the UK: Brexiting from the EU might also entail eventually exiting from the union of Great Britain and Northern Ireland. Johnson may end up as the last PM of the UK as we know it…
• The Brexit train could conceivably rush headlong towards a no-deal Brexit on Halloween or come to a shuddering halt with another extension and election. We expect this persistent uncertainty to weigh on business and consumer confidence, imposing a sustained drag on investment, big-ticket consumption and growth in both the UK and EZ, amid rising UK recession risk.
• Beyond these Brexit event horizons lie profound questions of where UK politics and policy are headed, including the EU relationship; the US “special relationship”; the financial and economic relationship of London with the rest of the world; as well as internal UK relationships – of England with the other countries of the Union.
• We therefore expect renewed downward pressure on sterling, gilt yields and UK domestic equities and would prefer global bonds and UK globally-oriented equities. The Brexit uncertainty, as a microcosm of unsettled global economic and financial inter-relationships, is likely to reverberate throughout the world.

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Risk warnings

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Important information

This article is for Professional Clients & Qualified Investors only. Data as at 5 August 2019, unless otherwise stated. 

This document is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.

Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.