OCM Commentaries

Market Commentary – 30th January 2019

By January 30, 2019 No Comments

Brexit uncertainty continues amidst Parliamentary chaos

In an attempt to break the parliamentary impasse, MPs debated and voted on several amendments to the Prime Minister’s Brexit proposals last night. In the vote, which essentially served to kick the can further down the road, MPs showed support for the renegotiation of the controversial Northern Ireland backstop and the desire to avoid a no-deal Brexit. As a result, Theresa May now has until 13th February to make progress on agreeing a deal which would pass through both parliament and the EU. If no progress has been made before this date, the PM has agreed to give parliament the opportunity to take control of Brexit negotiations.

What was agreed upon?

Despite significant divisions within the House of Commons, last night’s vote provided an insight into what changes to the existing withdrawal deal may gain a consensus within parliament. A number of amendments were debated, however the key takeaways from the vote are:

  • The Brady Amendment: The amendment put forward by Sir Graham Brady which states that the controversial Northern Ireland backstop should be replaced with “alternative arrangements” gained support from the house. The amendment was backed by the Prime Minister in an attempt to unify the Conservative party and gain a parliamentary consensus, and was passed by 317 votes to 301. As a result, the PM is now seeking “a significant and legally binding change” to the withdrawal agreement on this issue.

  • The Malthouse Compromise: The government has promised to consider the Malthouse Compromise, which suggests an alternative to the backstop and a plan to alleviate risks of a no deal Brexit should alternatives prove unachievable.

  • The Spelman Amendment: The amendment put forward by Dame Caroline Spelman which rules out the prospect of the UK leaving the European Union without a deal gained support from parliament, illustrating parliamentary intent on the issue. The amendment passed by 318 votes to 310.

  • The Cooper-Boles Amendment: Notably, the amendment put forward by Yvette Cooper and Nick Boles and backed by Labour was defeated by 321 votes to 298. The amendment sought to ensure that if a deal has not been approved by 26th February, the PM would hold a vote seeking an extension to the Article 50 negotiation period.

 

It is key to highlight that the amendments are not legally binding, however they do carry a great deal of political influence and show Theresa May what concessions must be made to ascertain a parliamentary consensus. As a result, Theresa May will be returning to Brussels to discuss ways forward with EU leaders this week.

Are the amendments likely to gain EU support?

Last night’s vote highlighted significant parliamentary opposition to the backstop in its current form, and the PM hopes that identifying where the problems lie will demonstrate to the EU what must be done to secure a deal which will be approved by parliament. As a result, Theresa May now has two weeks to persuade the EU-27 to renegotiate the withdrawal deal, seeking new terms to avoid a hard border in Ireland.

  • Reopening Negotiations

EU officials have so far demonstrated considerable opposition to reopening negotiations. Following last night’s vote, Donald Tusk and Emmanuel Macron reiterated that the EU would not renegotiate the existing agreement. Tusk asserted that the existing deal “remains the best and only way to ensure an orderly withdrawal of the UK”. According to Guy Verhofstadt, Brexit coordinator at the European Parliament, there is “no majority to reopen or dilute” the deal. Tusk has suggested that Brussels is open to an extension of the Article 50 negotiation period, however yesterday’s vote suggests that there is little appetite within parliament for an extension.

  • The Backstop

A key point of contention is that the UK parliament has again voted for what it doesn’t want, but remains no clearer on what it does want, in realistic terms which would be accepted by the EU. The Brady amendment states that the backstop should be replaced by “alternative arrangements” but does not specify what these are, and the Malthouse compromise suggests the use of technology as an alternative, however such technology does not exist. The EU is very unlikely to accept vague and fanciful alternatives such as this.

A suggestion has been to place a time limit on the backstop, however any time limit defeats the object of the insurance policy, and therefore would not be acceptable to the EU. The chances of the EU accepting any of these alternative options are very low, and it has already stated that it is not prepared to reopen negotiations or consider changes to the backstop.

  • No-Deal

Essentially, as far as the EU is concerned, although voting against a no-deal scenario shows the opposition for no-deal, if no agreement is made before the deadline, the UK will crash out from the EU on 29th March. If anything, the support for a deal highlights that the EU can continue to take a hard stance on Brexit and the UK is likely to either extend the negotiation period or have another referendum rather than no deal.

Additionally, plans to alleviate the risks of a no deal Brexit described in the Malthouse compromise are based on an interpretation of WTO rules which would mean that the UK would be unable to have frictionless trade for up to 7 years, and would likely bring on the worst recession since the 1930’s according to trade experts.

Implications of last night’s vote

Following last night’s vote, we remain no closer to agreeing a deal to leave the European Union on 29th March. While the vote highlighted the opposition to the backstop and desire among MPs to avoid a no deal Brexit, it brings us no closer to ascertaining a deal which would be agreed by both parliament and the EU. The vote has however encouraged further cross-party communications, with Jeremy Corbyn agreeing to come to the table and discuss a way forward with Theresa May. Essentially, the vote leaves us in limbo for a further two weeks while MPs agree on a plan B option.

Our view on where negotiations are heading

Overall, the EU is unlikely to offer concessions or substantive changes to the withdrawal agreement, and given that other alternatives to the Irish backstop are currently fanciful in nature, we are likely to see MPs voting on a very similar deal on 13th February. With the clock ticking and 58 days remaining until the Brexit deadline, uncertainty remains high. Prior to the 29th March deadline, we see greater cross-party compromise, and hope to see a Norway-plus style deal, which would allow the UK to remain within the customs union with access to the single market, however still retaining free movement of people and some exposure to EU laws. In our view this would be the most sensible compromise, however at this late stage, it depends on whether the EU would be open to more negotiations. A second referendum remains a possibility, with EU officials suggesting that they could allow a short extension to the exit period to allow for a referendum. It is our view that as the UK moves closer to a no deal Brexit, support would be gained for a second referendum and extension to the article 50 exit period.

Market Implications

While Brexit-related uncertainty remains high, we expect to see continued volatility in equity markets and sterling. Today, the FTSE was boosted by a sharp fall in sterling following last night’s vote as the probability of a no-deal Brexit increased. While intraday movements in sterling are likely to impact UK markets in the near term, it is clear that a substantial increase in the risk of a no deal Brexit would negatively impact equity valuations, therefore further volatility is expected between now and the 29th March Brexit deadline.

 

For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.

 

Model Portfolios & Indices

Following the defensive repositioning of portfolios in December, our OBI portfolios have a low equity allocation, with exposure predominantly coming from the FTSE 100 and S&P 500 shorts as well as the Odey Long/Short European fund. For this reason, the equity exposure within portfolios is inversely correlated to markets ahead of the expected decline this quarter. Markets were up over the week on speculation and momentum in the absence of positive economic data, however the US indices remained relatively neutral over the week following a series of more negative corporate earnings data. The FTSE 100 fell over the week  due to weaker corporate earnings data and Brexit related uncertainty. Markets had a slight boost ahead of trade talks between the US and China this week, partially offsetting the negative economic data. Over the week, the OBI portfolios performed well, outperforming the benchmarks at lower levels of volatility.

Despite a positive week for portfolios, it is key to highlight that markets fluctuate, and we must not allow ourselves to be caught up in short-term sentiment. The economic data continues to support our expectation for a drop back in markets in Q1, therefore we remain defensively positioned. It takes time for the data to feed through structurally, therefore as we wait for the data to feed through into markets, we are expecting volatile market conditions to continue, however it is key to bear in mind that the scenario will take time to play out. We must view intra week market movements in the context of longer-term market trends and stay content in the knowledge that portfolios are protected from the excessive risks in markets.

The impact of the defensive repositioning

The chart below shows portfolios following the defensive rebalances in December. At the lowest point, clients were 4% down and now they are flat, so the strategy is proving itself when markets decline. With the expectation that the recent rally will fizzle out and negative earning data will feed through into markets, we remain confident in this positioning. In the short term, we have avoided the drop and excess volatility.

Model Portfolio Performance

Important Information

 

The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.

 

This Day in History

On this day in 1969, the Beatles played their last public performance, on the roof of Apple Records in London. The impromptu concert was broken up by the police.

Have a great week,

VBW

Gina & Jason

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