Across the news today you will find numerous calculations of votes in Parliament, but the vote on Boris Johnson's deal is too close to call one way or another. This is complicated by the possibility of the proposal being amended by Parliament before the final vote. It is possible that a confirmatory referendum could be added, but Jeremy Corbyn seems determined to vote the deal down without a referendum. It may also have a delay clause attached to ensure that if it fails at a later stage before the 31st of October deadline, the UK does not fall out by default without a deal. There are many permutations but all of them appear to lead to a general election before Christmas. We are unwilling to predict exactly what will happen but I would caution against a knee jerk reaction on Monday.
As a deal emerged the pound initially moved stronger, but gave some of this back when the DUP rejected the revised deal. If the deal is accepted, we can expect further sterling strength. If rejected, we are into a delay and an election where the Tory vote may be split by the Brexit party. Therefore, we would expect to see the pound weaken. Much of the UK equity market, as we have outlined, looks cheap relative to gilts, therefore in the event of a deal, domestic stocks would be expected to rally and international facing stocks to lag due to the strengthening pound. With computer trading, the excitable nature of far east investors and short sterling position covering, we may see a big move first thing on Monday. Investors should remember that this is just a step, all be it a positive one, on the way to a trade deal. It is not a new trading arrangement, and if nothing is agreed by the end of next year we could be in the same position as we would have been without a deal. This period can be extended and given the EU bureaucracy, is likely to be extended to the end of 2022. In the meantime, we will have an election that could see a very different complexion to the UK government. Unfortunately, the certainty that investors seek may still be lacking after the weekend.
Our Investment Committee will meet on Monday morning to gauge the reaction and will communicate our view of events then. From previous experiences, I would be aware of overreacting as the FTSE 100 fell over 8% on the morning of the referendum result, only to reverse much of the move later in the day and to be back into positive territory in less than a week.
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