When it was announced that a Brexit deal was ready, the pound rose but this was short lived and as Ministers resigned on Thursday morning it declined. Gilts rallied, particularly Index-linked gilts. At index level, UK equities were bolstered by the increased value of overseas earnings. However, this disguised a very wide dispersion of returns amongst individual stocks with domestic earners falling and international stocks rising. As a result, well-diversified portfolios with some international exposure should be positive. In what seems to be a Brexit-obsessed world, we should remember that there are many other influences on portfolio valuations.
This week we have seen rapid changes in the prospect for Brexit. The Prime Minister presented the draft Brexit agreement to the cabinet where a majority of them backed her. This was followed by resignations of those that don’t agree including the Brexit Secretary Dominic Raab. On Thursday morning, May made a statement in the house looking for support. As I write, this does not appear to be forthcoming. Jacob Rees-Mogg and other pro Brexit conservatives are pushing for a motion of no confidence. If 48 Tory MPs request a vote of confidence then it will be put to the Parliamentary party. The motion of no confidence would need 158 members to pass and a leadership election process would start. In this situation, the candidates are gradually whittled down by a series of votes among Tory MPs until just two candidates remain. These two then go to the country. The Conservative party membership is believed to be more in favour of Brexit than remain, so a pro Brexit candidate would be likely to win. MPs that favour remain or want to avoid a hard Brexit may want to stick with Theresa May rather than risk a hard line Brexit leader. As a result, even if 48 members request a no confidence vote, May's leadership could survive.
At present, it seems unlikely, despite the Prime Minister's best efforts, that she can get Parliamentary backing for the Brexit deal as it stands. Equally if Parliament was asked to vote for a hard Brexit falling back on World Trade Organisation rules, then that would probably not pass. No one wants to contradict the referendum so there may not be a majority to remain. With Parliament unable to decide, a General Election or a second referendum could be possible. The Democratic Unionist Party and the Conservatives do not want to hand the keys of Number 10 to Jeremy Corbyn, therefore a vote of no confidence is not likely to pass in Parliament. Theresa May has repeatedly ruled out a second referendum, but faced with this type of gridlock it could be preferable to an election.
This is all speculation and no doubt there will be more surprises in the days to come. However, a well-diversified portfolio of international stocks and gilts is benefitting from Theresa May's discomfiture. International stock markets are likely to be more sensitive to changes in Trump's trade policy, US interest rates and negotiations on the Italian budget, than Brexit. Thus while following the twists and turns of domestic politics we will be watching the Chinese/US positioning on trade in the lead up to the G20 meeting at the end of the month, in addition to comments from the Federal Reserve ahead of their December meeting and Budget news in Rome, with equal interest.
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