What does May’s Brexit defeat mean for investors?
Theresa May’s government is currently fighting for survival, following a crushing defeat in the House of Commons over the prime minister’s Brexit deal.
Her deal was defeated by 230 votes, which represents one of the most significant government defeats in history. In response, Labour leader Jeremy Corbyn tabled a motion of no confidence in the government, with a vote scheduled to take place in the House of Commons this evening.
The crushing defeat not only leaves the prime minister and her government’s future hanging in the balance, but also means the direction of travel for the UK’s exit from the European Union (EU) is less than clear. With only 72 days left until the Brexit deadline, investors are likely to be feeling nervous.
In response to the defeat, the prime minister said that if she survived the vote, she would start cross-party talks to attempt to reach a consensus on an alternative deal.
As May fights for survival, there are six potential outcomes:
- A renegotiation takes place and parliament agrees to an alternative deal with the EU
- Article 50 is extended, which means the UK’s deadline for leaving the EU is extended
- No deal with the EU is agreed and the UK exits on World Trade Organization terms
- There is a vote of no confidence in May’s leadership
- A general election is called
- A second referendum on the UK’s exit from the EU is called
What happens if Theresa May loses tonight’s vote?
If there is a vote of no confidence, the government will be given 14 days to regain the support of MPs. If this doesn’t happen, parliament will be dissolved and a general election is likely to be called.
What if Theresa May survives?
It appears that the prime minister still has the support of the Democratic Unionist party, so commentators suspect that she will survive tonight’s vote. If this is the case, she could try to renegotiate with Brussels for an alternative deal and then try to win the support of MPs across political parties.
How are markets reacting?
The vote caused sterling to rise against the dollar to $1.287 on Tuesday, making up ground lost earlier in the day. On Wednesday morning at 10.20am, it was trading at $1.287.
It was a different story for the FTSE 100, however, which fell 0.41% to 6,866.5 points. This is likely to be down to sterling strength and the uncertainty surrounding Brexit. A stronger pound is bad news for the FTSE 100 index, which is largely made up of companies which derive a large portion of their earnings overseas and therefore benefit when sterling is weak.
However, the FTSE 250 index, which includes more domestically focused mid-caps, was up 0.14% on the day at 18,455.6 points. This is because its constituents typically benefit from a stronger pound.
How are professional investors responding?
Although the vote appears to spell uncertainty, some investors believe that it is still possible for a deal to be agreed.
David Roberts, co-manager on the Liontrust Strategic Bond fund, notes that market movements in the wake of the prime minister defeat last night indicate that global investors believe the chances of a “hard” economically damaging Brexit have decreased. They expect the UK and European politicians to compromise on a “plan B”.
“Markets, perhaps unlike voters, are ruled by the head, not the heart and again are stating that compromise, that working together, can bring benefits to all,” he said.
Laith Khalaf, senior analyst at Hargreaves Lansdown, agreed: “Markets think a softer Brexit may start to take shape now the vote has failed, as parliament gains greater control of the process. This is a change in dynamic, as previously government failures have heightened expectations of a hard Brexit, and have weighed sterling down.”
However, David Zahn, Franklin Templeton’s head of European fixed income, is not convinced that a “Plan B” will be possible.
“We have long argued that the best Brexit scenario would be a deal between the United Kingdom and the EU governing post-divorce trade, and we continue to believe that. But after yesterday’s UK parliamentary vote that seems all but impossible, given the tight timeline,” he added.
Could there be a Brexit deadline extension?
Richard Buxton, manager of the Merian UK Alpha fund, suspects the prime minister is likely to remain in post.
“If she is unable quickly to secure the necessary concessions from the EU, and to win the expected vote of no confidence, there is every probability that the Article 50 “clock” will – in due course – need to be paused, initially with a view to securing a further period of negotiation time.
“Given parliamentary rules requiring 21 days for Parliament to approve legislation, the latest a temporary extension of Article 50 could occur would be 26th February,” Buxton explained.