What Is Going on with Brexit Now?

Earlier this week, political upheaval once again shook the United Kingdom.

In a surprising turn of events, newly-appointed Prime Minister Boris Johnson’s government lost its majority after a former Conservative minister joined the Liberal Democrats. Perhaps more importantly, the Prime Minister removed the whip from 21 rebel Tory MPs who voted against his government, in effect barring them from government and further weakening his position. Following this shake-up, the odds of a no-deal Brexit, not so long ago a strong possibility from the hardline Conservative administration, appear to have somewhat declined. Unfortunately, the story continues to unfold curiously. Boris Johnson wants to precipitate an election; Jeremy Corbyn, the leader of the opposition, will only allow for an early election if a bill barring the possibility of a no-deal Brexit passes Parliament and is signed into law by the Queen. This seems increasingly likely: the bill has already passed the Commons and is making its way, with numerous amendments, through the Lords. Should the bill indeed pass, the Prime Minister will likely call for snap elections ahead of the proposed October 31 Brexit deadline. The outcome is murky: if Johnson is reelected, he will likely remove the earlier legislation that made the reelection possible and the odds of a no-deal Brexit by October 31 increase; should he lose, Brexit will be deferred and the odds of a second referendum increase, reducing the potential impact on the global economy. In response to this ongoing confusion, Bank of England Governor Mark Carney announced that the central bank estimates a 5.5% contraction in the UK economy in the event of a “worst case scenario” Brexit, involving severe disruption to the trade of goods and services and damage to UK financial institutions in the event of no deal. Moreover, Carney reiterated that the BoE would remain uninvolved in the precipitous fall of Sterling, which, as shown in the chart below, has declined substantially since the original vote in June 2016. On the continent, European lawmakers are similarly pessimistic about the outcome of a no-deal Brexit. On Wednesday, the European Commission suggested that such an event may be declared a “disaster,” and has freed up nearly 600 million euros for release from an emergency fund to aid EU countries most affected by trade disruptions. Further money could be freed up from other existing legislation to help workers struggling with Brexit-related job disruptions. Brexit with a deal, by contrast, would likely not necessitate the use of these funds, as the long transition period would minimize economic impact. For investors, the path forward remains foggy and hazardous. The fate of the UK economy is uncertain; Sterling will likely continue to tumble in the absence of a deal or an extension; the Irish border issue remains a pressing political problem with the potential to reignite one of the world’s oldest conflicts; and the impact on continental Europe, if as bad as the European Commission seems to fear, could be disruptive on a global level. At the same time, this most recent shake-up in government could mean that Brexit never comes to pass, and if it does, an orderly and prolonged transition could bring business investment back and boost the economy. For now, the best course of action may therefore be no action, assuming no large position in Sterling assets in either direction while continuing to seek a well-diversified portfolio of assets elsewhere.

Sterling has tumbled since the June 2016 Brexit vote

Related: What Is a Fair Price to Pay for Stocks?