Kempen's Commentary: Brexit remains uncertain
After some more drama in the Brexit saga, the EU member states have now agreed to another postponement of Brexit. Will this put an end to the uncertainties surrounding Britain’s intended withdrawal from the EU?
Who will win the elections?
It seems that if the British go to the polls on 12 December, the Conservative Party will be the largest voting bloc. But whether this also means a Conservative majority in British parliament is far from certain. We all remember the gamble that former prime minister Theresa May took in that regard. So, it’s still quite uncertain whether there will be a majority in favour of a Brexit deal after the elections. Prime Minister Boris Johnson wants to keep Northern Ireland in the EU customs union, which means that there will be a border in the Irish Sea. In addition, there is resistance about the acceptance of European regulations for the labour market, immigration, the environment, et cetera.
What comes after the transition deal?
But even then the uncertainty is not over yet. The transition period that is debated now finishes at the end of 2020. At the start of Brexit, there seemed to be enough time to settle the final relationship between the UK and the EU. But the British have been lingering ever since and now the end of 2020 is not that far away anymore. This gives rise to the question whether a comprehensive trade agreement is still even realistic, as it usually takes years to come to such a treaty. And by mid-2020, the UK must also decide whether an extension will be requested on the transition period. Even then, a no-deal Brexit is still a possibility.
British economy is falling behind
Before the Brexit referendum, the economy grew even faster than that of the eurozone, but now the roles are reversed. In the second quarter of 2019, the British economy even decreased. The growth in business investment has virtually stopped. At first glance, British equities don’t seem to have been affected so much. In local currencies, the performance of British equities is virtually the same as that of eurozone shares. But that is because the pound has mainly absorbed the blows. Converted into euros, British equities are more than 15 percentage points behind.
In conclusion, we think that the risk of a hard Brexit has decreased, but that the uncertainty is not entirely over yet. This can have an impact on British equities, in particular converted into euros.