While a ‘no-deal’ Brexit is not a nailed on certainty, its likelihood has increased with the arrival of the UK’s new Prime Minister Boris Johnson. The pro-Brexit politician is likely to take a more confrontational approach to Brexit matters that will have a domino effect on the fortunes of those with exposure to the British market, according to market commentators.
Nigel Green, founder and chief executive of financial advisory outfit deVere Group, which has $12bn under advisement, warned clients that the UK’s political shake-up with its “unpredictable new Prime Minister” and the ongoing deadlock in parliament, the slowing economy, the possibility of another general election, and the increasing likelihood of the UK crashing out of the EU with no-deal will contribute to this becoming a “volatile next few months” for investors in UK assets.
Green said there will inevitably be winners and losers as Johnson’s policies and ambitions are pursued “As such, this is a time for investors to be aware and alert to mitigate the risks and take advantage of the opportunities as they arise. For many, the current landscape will be a good excuse to start a rebalancing in favour of global equities, bonds and perhaps property.”
In fact, many in the City of London are now pricing in a no-deal scenario. Johnson, who replaced Theresa May on Wednesday (24 July), was a figurehead of the "Vote Leave" campaign in 2016 and has said that he wants the UK to leave the EU by the deadline of 31 October 2019, regardless of whether the EU agrees to a revised deal.
"With the election of Boris Johnson, the likelihood of a sustainable compromise appears lower than before," said Colin Ellis, Managing Director of Credit Strategy at Moody’s. "Our view remains that a no-deal Brexit would have significantly negative credit effects for the UK sovereign and related issuers."
And some are fretting that a no-deal malaise could spread well beyond British shores and fan recessionary headwinds further for Europe’s economic powerhouse – Germany – where economic data already makes for uncomfortable reading.
A recent seven-year low in manufacturing output offers the latest example of that. Alex Altmann, partner at tax advisory firm Blick Rothenberg, said the impact of a no-deal Brexit would cost the German economy billions of euros.
“The UK is Germany’s largest European export market with over 20% of all exports going across the Channel. In addition, almost all exports to Ireland go via the UK as well. A no-deal Brexit with customs barriers, regulatory diversion and uncertainty around immigration will cost the German economy around 1% of GDP with the potential of 200,000 job losses in the UK and Germany, which could move the country into a recession in the fourth quarter of this year.”
Moving on from macroeconomic permutations to the fate of the pound sterling, Kit Juckes, Head of FX at Société Générale, said sterling shorts have grown further and are moving in line with both EUR/GBP and GBP/USD. “I still think EUR/GBP reaches 0.95 but not parity on a no-deal exit, but there isn't a case for buying sterling here.”
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