Investors More Optimistic After Brexit Vote, Says US Asset Manager

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Dec Mullarkey, Managing Director, Investment Strategy, Sun Life Investment Management ($48 billion USD in AUM)

16th January, 2019

As expected, Theresa May’s Brexit deal failed to gain support. However, the overwhelming defeat now places more of a burden on the EU to help May with some substantial changes. Nuanced assurance won’t be enough to convert the opposition. For instance, providing some comfort that the Northern Ireland backstop won’t trap the UK in a permanent no man’s land is essential to consolidating support. 

Theresa May has vowed to fight on, and she is expected to prevail in a no-confidence vote tabled by Labour for tomorrow. After Tuesday’s vote she expressed a willingness to work across the aisle to close differences. That was a significant olive branch as she now understands the need to extend her influence to marshal a majority for a Brexit solution.  

The immediate realization from the vote is that the UK will need to request an extension of the exit deadline, as continuing negotiations will quickly run down the clock. The other outcome is that Theresa May is pivoting to a more conciliatory stance and likely will look to isolate the hardliners. That should significantly reduce the risk of a no-Brexit deal mistake.

 The immediate strengthening of Sterling versus the Euro, the most immediate indicator of Brexit stress, after the vote suggests investors are becoming more optimistic about a deal. Dialling down the Brexit tail-risk should also start to support equities, particularly those at risk of having their export relationship disrupted. 

While the vote on Tuesday initially looked like an epic failure, it may have been the shocking scorecard that was needed to force the EU to cooperate more and to pressure Theresa May to tap into the middle ground so she can consolidate a majority.