Brexit vote postponed: Investors face some more days of uncertainty

Topics Brexit | Markets | Boris Johnson

The vote on the Brexit deal has been delayed yet again after the British Parliament voted to adopt an amendment sponsored by MP Oliver Letwin. This says the adoption of a Brexit deal must be postponed until all the enabling legislation for the post-deal scenario is in place.

The UK has until October 31 to accept the latest Johnson deal. This delay could mean that, under the so-called Benn Act, the UK has to mandatorily ask the European Union (EU) for an extension till January 31 – something that Prime Minister Boris Johnson has not agreed to do. There will be another vote on Monday and it is possible that may mean a second referendum. It is entirely unclear what the UK’s votes would opt for, if there is a second referendum.

For the financial markets, especially India, this makes last week’s relief rally premature – at least for now. We are back to the same unclear situation that prevailed before the latest Brexit deal was announced. Traders and investors will have to handle some more days of uncertainty. There is likely to be excess volatility in the currency markets as well, with the pound (GBP) coming under pressure after a sharp bounce last week.

Lost economic growth

The outlook for the UK economy remains poor as well. Britain is already seeing poor economic growth. Some estimates project that Johnson’s proposed deal would reduce per capita gross domestic product (GDP) by 6.4 per cent to 6.7 per cent in growth in the next 15 years. Every estimate and model in the public domain agrees that any form of Brexit will mean lost economic growth.

The Johnson deal sees Northern Ireland become part of the UK customs territory rather than the EU. But, Northern Ireland will also have to align to some EU rules. This will affect the movement of goods, though it doesn’t substantially change the rather poor outlook for services. The UK will have no customs union with the EU, no “level playing field” arrangements and more limited, if any, free trade agreements (FTAs). British firms wanting to maintain free access to the Eurozone will have to place headquarter in Ireland, or some other place within the Eurozone to tap its 450 million consumers in the current fashion.

EU membership attracted many foreign companies, including the biggest American banks; Indian IT firms; Tata Group companies – Tata Motors, Tata Steel; Japanese auto companies, etc., which located their Europe headquarters (HQs) in Britain. About 46% of the UK’s exports (GBP 289 billion in 2018) go to the EU. About 54 per cent of the UK’s imports (GBP 345 billion) come from the EU. In addition, the City of London could lose its eminence as a global financial hub.

The EU will naturally be affected by the loss of its second-largest economy as well, which is one reason why the EU is expected to continue seeing a slowdown. On the other hand, removal of uncertainty about future direction could mean that corporates which have put their investments on hold will take a chance and this could provide some boost to GDP.

In nut shell, investors should brace for extremely high volatility in global currency markets this week, in global commodity markets, and in the equity prices of companies with large EU, or UK exposure. This could continue until there is some clarity on the future.

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