To deal or not to deal…

Date: 24 January, 2019 - Blog

It only took Shakespeare six words to phrase a universal question. The famous soliloquy of Hamlet is probably the best-known line from all drama and literature. It features perfectly a man who doubts. Hamlet’s dilemma is pretty straightforward: while dissatisfied with life, he is unsure what death may bring. This sounds like a metaphor of the UK for the last couple of years, even if the actual problematic of Brexit is significantly more complex.

Theresa, the stubborn scapegoat

Female British politicians definitely deserve respect. Theresa May, just like Margaret Thatcher before her, is showing very strong resilience and determination, despite broad-based opposition. She has actually survived several attacks, with some of them of high magnitude, including from inside her Party. But let’s face it, no credible alternative leader is emerging within the Tories, particularly not in the hard-Brexit front, led by the flamboyant B. Johnson. So far, he neither managed to coalesce enough support in the Party to overthrow Theresa, nor to exit the Party and attempt for a solo adventure.

The Labor Party is deeply encumbered. It neither carries an endogenous political vision, nor an alternate proposition. There is actually no consensus on a new referendum or on trying to force new elections. Corbyn therefore refrains from strongly attacking Prime Minister, who could be victimized and gain sympathy of electors in a classical reflex in favor of the ¨weakest¨.

Theresa May is likely to stay in power in the short-term, at least up to the next March deadline

Towards the end of a lose-lose imbroglio?

It is an understatement to say that the Brexit vote decayed the Brit’s political life in past years. Europe has also indirectly suffered. The tentative divorce of the UK has shaken its self-confidence and created a vacuum that populist forces are trying to take advantage of. Such an uncertainty is reducing animal spirit of the continental private sector. UK also remains an important exports’ market that could be much less buoyant in the future. Still, the UK problem has provoked, somewhat surprisingly, greater cohesion among European countries to make very few – if any – significant concessions to London.

Last November, the total withdrawals of UK-focused total equity funds (since Brexit) hit $20bn. According to a survey conducted by the London listed advisor Schroders, 35% of clients moved assets out of the UK in 2018 (21% in 2017). Similarly, a BoA survey confirmed that UK equities are the most unloved among 22 asset classes. The discount on UK equities has risen to an unusually high level.

Risks are high, when it comes to investing in the UK for global investors. But opportunities may be great…

What’s next???

Experts consider that the risks of a ¨no deal¨ have now significantly receded. Let’s hope. Indeed, in a scenario where the UK ultimately leaves with no deal and no referendum, the country would enter a damageable stagflation. Indeed, investment would collapse, and large parts of the economy would face significant obstacles / disruptions, while salaries would spike (brain drain and recruiting difficulties, namely for legal reasons).

In any case, UK monetary policy setting will prove highly tricky. As of now, policy rates are totally inadequate for a Brexit cancellation or for a ¨no deal¨ scenarios, which, together, represent the majority of odds… The very controversial and alarming message from Mark Carney resonates like a mayday call!

Brexit Epilogue is probably approaching

This good news is not discounted by the markets

Risks remain high and visibility low, but this creates a cheap opportunity of investing in the UK

  • The £ is cheap: a new referendum would fuel its significant rebound from current level
  • The collapse of UK domestic-orientated equities may prove a – historic – buying opportunity