Another day, another Brexit vote, the conclusion of which is that government will seek an extension to the Article 50 deadline. UK lawmakers voted 412 to 202 in favor of a motion to request a delay in the UK's formal exit from the EU, which had been scheduled for 29 March.
But as is often the case with Brexit, things are not so simple:
- The duration of the delay remains uncertain. UK Prime Minister Theresa May will put her exit plan to Parliament again next week, hoping to reverse two previous votes by lawmakers against her agreement. The PM has said that if Parliament finally backs her plan, she will only request a delay until 30 June. If her plan is rebuffed again, she will seek a longer extension of several years. This appears calculated to pressure Eurosceptic members of her party to support her plan, or risk calling into question the British exit altogether.
- The UK will need EU approval for an extension. All 27 remaining EU heads of state will have to agree to the delay. The EU27 have said that any request for an extension would have to be accompanied by a valid reason to do so. In the case that the UK Parliament passes the Withdrawal Agreement next week, that reason will be a short technical extension to pass the required legislation. If the extension request is for a longer delay, then it will likely need to be with a commitment to review the UK's current red lines.
- Even a postponement does little to clarify the next steps. The path of least resistance to the conclusion of Brexit is that the UK leaves the EU with a version of the current Withdrawal Agreement in place. It may well happen before the end of June. If the delay is longer, then other options have to be considered. It is likely that a majority of MPs would likely support a softer, Norway-type relationship with the EU. However, May is likely to resist this option since it would risk splitting the Conservative Party. If the impasse in Parliament continues, a general election or a second referendum would become more probable. At this point, it is possible that the UK could opt to remain within the EU.
Given the uncertainty, we do not advocate taking directional views on sterling, but we remain alert to entry and exit opportunities if volatility persists. For the time being, the most sensible approach seems to be to hedge sterling's downside risks. Within equities we recommend a diversified dividend strategy that is likely to outperform in most circumstances. In our global tactical asset allocation, we are neutral on Eurozone equities and underweight UK equities as their volatility is likely to exceed their historical norms, and we see better value in emerging market USD-denominated sovereign bonds.
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