Brexit: Endgame

Following Theresa May’s last ditch efforts to renegotiate the Irish backstop with Jean-Claude Juncker; James Illsley, portfolio manager for the JPM UK Equity Core Fund, discusses Brexit, what's next and the market reaction.

Mar 12, 2019
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To read part II, please click here 

To read part III, please click here 

To read part IV, please click here 

The parliamentary stage is now set after Theresa May’s last ditch efforts to renegotiate the Irish backstop with Jean-Claude Juncker. The following “concessions” will now sit alongside the original withdrawal deal:

  • A Joint Interpretative Instrument - This has the same legal weight as the Withdrawal Agreement and commits the European Union (EU) to act in good faith and not “trap” the UK in the backstop. There is also a beefed up arbitration mechanism that the UK could pursue. Something along these lines had been flagged in recent weeks.

  • Political Declaration - Both sides will work towards an electronic/technological solution to the Irish border by December 2020. This was part of the “Malthouse Compromise”, so again it is not surprising to see its inclusion here.  

  • A Unilateral Statement by the UK - This gives the UK's view of the commitments made by the EU, and reserves the right of the UK to exit the backstop if it believed the EU was acting in bad faith. This measure is new and according to legal opinion has some legal weight but would be open to legal challenge. It’s certainly not as legally robust as the Withdrawal Agreement or the Joint Interpretive Document.

The process now moves back to the UK parliament with a few key events to watch out for:

1.    The Attorney General, Geoffrey Cox, will give his judgment on the new package later today. This judgment is likely to swing many MPs one way or another.

2.    The reaction of the Democratic Unionist Party (DUP) will be important. If the DUP back the deal, many of the Tory Brexit supporters in the European Research Group (ERG) would be expected to fall in behind. The DUP met the Chief Whip last night.

3.    The reaction of the ERG will be crucial. The group has its own lawyers studying the new backstop arrangements, with expectations that it will meet around 4pm today (12 March). Already, some signs of splits are emerging within this group.

What next?

Initial thoughts are that if Theresa May does manage to get her deal through parliament tonight, the vote will be very tight. If the deal does pass, expect sterling to rally further and domestic stocks to perform strongly (see below).

If the deal is rejected once more (which is still seen as the most likely outcome and consistent with sterling only being up marginally so far today – as at 8.30am), then the size of the defeat clearly matters. A defeat of more than 50 votes may be viewed as terminal for the deal. Given previous votes, a subsequent vote on a “No Deal” Brexit is likely to be rejected tomorrow and a vote to seek an Article 50 extension would be likely to be passed on Thursday. This could increase political uncertainty in the short term with all options possibly back on the table.

If the vote on the deal is defeated by a small margin today, then expect Theresa May to try to gain approval with another vote in the next few weeks after intensive lobbying of the objectors.

Market reaction

With some positive progress, the Brexit playbook is rolling out as would be expected:

  1. Sterling is up—modestly—at USD 1.32 vs. the start of the week (USD 1.30).

  2. Domestic stocks are up, international earners down.

  3. Housebuilders and domestic banks are at the forefront (for example, Persimmon is up 3.6% and Lloyds Banking and Royal Bank of Scotland are both up 2.5%, as at 8.45 am).

  4. Life insurance and real estate stocks are also up on the day.

  5. Airlines are specifically exposed given rules on EU ownership so no surprises to see Easyjet up 2% (helped by speculation it will drop out of bidding negotiations for Alitalia).

Source: Bloomberg as at 12 March

The scale of the moves today are modest, and reflect the fact that the outlook is still very much in flux. If we see further progress today then expect these moves to accelerate.

(With thanks to Ian Richards and the strategy team at Exane BNP Paribas)

To read part II, please click here 

To read part III, please click here 

To read part IV, please click here 

James Illsley is the portfolio manager for the JPM UK Equity Core Fund

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James Illsley

Fund Manager, JPM UK Equity Core Fund and JPM UK Equity Plus Fund, J.P. Morgan Asset Management

James Illsley is a portfolio manager of the JPM UK Equity Core Fund and the JPM UK Equity Plus Fund within J.P. Morgan Asset Management's UK Equity team.

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