As market expected, the UK Prime Minister’s Brexit deal did not pass in the House of Commons on Jan 15 and the risk of a cliff-edge Brexit in March has further escalated. Theresa May only received 202 vote on her deal, which is far below the 320 votes required. As defeated by a huge majority, Theresa May needs to come up with an alternative plan within three working days after the Jan. 15 vote and she would have cross-party talk to determine a way forward to Brexit
A no-confidence vote in the government is less likely to succeed
After the result, the labour party has tabled a no confidence vote in May’s government in an attempt to trigger a general election but we think it is less likely to succeed despite there is a substantial degree of opposition to May’s ability from within her own party. It is expected that every Tory MP including the DUP would support vote for the existing government in a no confidence bid in order to avoid Jeremy Corbyn and Labour to get into power. As a result, the no-confidence vote may eventually unite the Conservatives around May and even strengthen her premiership to push through a later iteration of the withdrawal agreement.
A general election or second referendum
A general election is called either by a vote of confidence or a qualified two-thirds majority of MPs in favour of a general election, while a second referendum that giving voters an option to stay in the EU again is possible without an election. However, we think unless a no-deal Brexit is really imminent, a general election is unlikely to occur since most parties in UK are not properly prepared for an election while the labour party is not likely to win in tomorrow’s vote of confidence. Even if labour wins, Theresa May still have another 14 days to regain the confidence of MPs and it required another 25-working day for the election to be held if the parliament is finally dissolved. The whole process for an election may take about 8 weeks to go and a new government may be formed during the grace period. On the other hand, a referendum can only happen unless Brexit is being delayed (i.e. to request an extension of Article 50) as time is quite tight now and it takes around 22-24 weeks for a referendum to take place. Nevertheless, there is an increasing voice that the idea of a second referendum as the only way to break the current deadlock.
No Brexit or No Deal Brexit
The possibility of no Brexit increases after yesterday vote as Theresa May has just mentioned before that there is only three options on the table – “her deal, no deal or no Brexit”. Since her deal has already been rejected yesterday, therefore a “No Brexit” option is still a better option than a “No Deal Brexit” despite this actually means the Parliament is “stealing” the Brexit from the British people. On the other hand, a No-Deal Brexit would be the least desirable outcome and could create devastating impact to UK economy, from automotive industry, banks and financial sector, tech industry to even ecommerce platform. According to BoE’s Brexit analysis, a No Deal Brexit may hit the economy between -4.75% to -7.75%, with sharply lower sterling, higher near-term inflation, lower consumption growth and lacklustre business investment.
All in all, the good news is that market has largely expects yesterday’s voting results and the move in GBP and equities would likely be limited on this single news. Besides, we expect market should react positively no matter that the next step is a no-confidence vote, a general election or a second referendum since either option should help to mitigate the risk of a No-Deal Brexit. In contrast, market has currently priced in a 25% probability for a No-Deal Brexit and markets could hit hard if this worst scenario materialises.
Source: iFund/Noble Apex