The Brexit Saga Continues
#Market Strategy — 21.10.2019

The Brexit Saga Continues

Roger Keller



Norwegian Krone: upside potential I BNP Paribas Wealth Management

IN A WORD

Over the weekend, the British Parliament did not want to vote on the agreement negotiated between Boris Johnson and the European Union, preferring to postpone the vote.

Brexit before the end of the month is still possible.

All the reactions of politicians and positions given since Saturday support the prospect of a sufficient number of votes to obtain a majority in favour of the proposed agreement in the near future. Financial markets should therefore give this scenario the benefit of the doubt. In other words, beyond any expression of disappointment associated with continued uncertainty, the pound should be able to continue to appreciate, (if so we might have to change our price targets), bond yields should continue to rise and equities should become less undervalued. For the time being, we are maintaining a neutral opinion on the latter because the risks of negative surprises remain and the risk-return ratio is not very favourable.

The British Parliament decides to postpone the vote on the divorce agreement

By 322 votes to 306, the British Parliament voted in favour of postponing the vote on the divorce agreement negotiated between Boris Johnson and the European Union. The House of Commons needs more time to digest the content. The opposition, the 10 members of the Democratic Unionist Party of Northern Ireland, played a key role in the defeat.

This does not necessarily prevent the Prime Minister from achieving his goal of leaving the European Union by the end of the month. Boris Johnson will make every effort to do so as of today.

In the meantime, he has sent three letters to Brussels asking the European Union to postpone Brexit until 31 January 2020, while stressing that he would prefer not to have to use this deadline extension. For Boris Johnson to obtain the extension, the European Union must accept it unanimously. This may take several days.

The likelihood of an agreement has increased further

Analysis of Saturday's vote and all the reactions of politicians and positions since then support the prospect of a sufficient number of votes to obtain a majority in favour of the proposed agreement. However, things are moving quickly, as seen last week, with various shifts between optimism and pessimism.

Before Saturday's developments and the resulting news flow, our base scenario was that an agreement was much more likely than no agreement at all (a 55% probability versus 10% respectively). We had given a 35% chance to the scenario of no exit from the European Union.

The markets should give the deal the benefit of the doubt

Any expression of disappointment related to prolonged uncertainty should be temporary as the likelihood of the United Kingdom leaving the European Union without an agreement has decreased.

Financial markets should therefore give the adoption of an agreement the benefit of the doubt. In other words, sterling should be able to continue to appreciate and we might revise our target between the pound and the euro from 0.88 to 0.85, both at 3 months and at 12 months. Bond yields are expected to continue to rise. Equities (especially domestic) (FTSE250), should become less undervalued. It is very tempting to adopt a positive view because a slight revaluation coupled with an appreciation of the currency should more than compensate for the earnings growth which is lower than the world average. For the time being, we are maintaining a neutral opinion on equities because the risks of negative surprises remain and the risk-return ratio is not very favourable.

Written by ∨

Roger Keller

Chief Investment Advisor
BNP Paribas Wealth Management

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