Market Comment - Brexit uncertainty continues

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Yesterday night’s UK parliamentary vote on Theresa May’s proposed Brexit deal resulted in a painful defeat for the British prime minister. With the deal in its current shape now off the table, uncertainty around Brexit is set to continue, says ABN AMRO’s Mary Pieterse-Bloem.

Last night’s vote marked a historic defeat for the British government. Only 202 members of British parliament approved prime minister May’s Brexit deal, whereas 432 members voted against it. On top of that, May faces a no-confidence vote, initiated by Labour Party leader Jeremy Corbyn, which is scheduled for today at 7pm (British time). Now that the proposed Brexit deal is effectively off the table, the range of possible next steps is wide and includes renewed negotiations in order to adjust the deal, an extension to the current transition period (the UK is due to leave the EU on 29 March), general elections, a second Brexit referendum and even a no-deal exit.

Lingering uncertainty

Mary Pieterse-Bloem, head Fixed Income at ABN AMRO, believes the likelihood of an extended transition period has increased, as most scenarios seem impossible to realize before the 29 March deadline. As a consequence, uncertainty around Brexit is bound to continue. Pieterse-Bloem: “The way forward is foggy. We consider this to be a negative, not only because lingering uncertainty makes investors wary but also because it affects business confidence. Surely, the looming Brexit, next to other factors like the US-China trade conflict, has played its part in attributing to the recent economic weakness in Europe and volatility in equity markets.”

Although UK assets showed a muted response to last night’s vote, Pieterse-Bloem points out that the impact of Brexit is hard to ignore: “Since the Brexit referendum in June 2016, UK stocks have underperformed worldwide stocks by some 10% in US dollars. Over the same period, the British pound depreciated by nearly 15% on a trade-weighted basis.” ABN AMRO believes that the Brexit uncertainty has weighed and will continue to weigh on market sentiment in general.

More cautious stance

When ABN AMRO recently recommended a more cautious approach to investing, geopolitical uncertainties were also taken into account. Pieterse-Bloem: “We suggest investors to take some risk off the table by scaling back their allocation to equities. We believe a neutral positioning in equities is warranted, not only in light of slower economic growth in 2019, but also because of a number of geopolitical uncertainties – including the lingering uncertainty around Brexit.”