iFund- Brexit, a never-ending cycle

2019-03-19 10:02
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Even though the prospect of Brexit is unclear, the performance of financial markets and assets is stable, in which the UK stock market has increased by 0.4% in the past two days, and the pound has increased by 3.9% in 2019 and 1.9% in the past two days. It implies that the possibility of a no-deal Brexit is just 10% to 15% in the market’s point of view, while Goldman Sachs predicts that the chance of UK staying in EU is 35%.

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After the revised deal of Theresa May’s was rejected on Tuesday, MPs voted against a no-deal Brexit under any circumstances by margin of 312-308 last night. MPs will vote on whether Brexit should be extended tomorrow.

The amendment of rejecting no-deal Brexit was passed last night. However, the vote itself has no legal ramifications. If MPs veto the vote on delaying Brexit tomorrow, the UK still needs to reach an agreement before the deadline of March 29. Otherwise the risk of hard Brexit will continue. Moreover, despite of the vote being passed tomorrow, the UK still needs to propose a “credible reason” for delaying Brexit and 27 state members of the European Union needs to unanimously agreed.

Besides, delay of Brexit brings uncertainties. There are two main scenarios. The first one is to extend the Brexit deadline to 30 June as the one that proposed by the British government initially. However, this deadline may not be approved by the EU as it has been repeatedly claimed that the UK must leave the EU before the European Parliament elections, which will launch during 23 May to 26 May, avoiding role conflicts. Therefore, a deadline before 22 May should be a more acceptable date for the EU. Another possibility is to postpone the Brexit deadline by two to three years, allowing stakeholders to have more time to negotiate for a more viable agreement. This option allows the UK to retain its status and rights during the negotiations while the EU can also solve its financial budget problem in short term. However, no one can ensure the agreement can be reached after two to three years delay, and more problems may be arisen during the period. For example, the damage to the British economy may be even greater during the period, and the risk of Scotland independence may be arisen too.

We believe that some investors may be overly aggressive and underestimate the possibility of a no-deal Brexit and the impact of the UK recession on the global economy. Bank of England warned that if UK leaves the EU with no agreement, the UK’s inflation rate and unemployment rate will rise to 6.5% and 7.5% respectively, while the house prices and the pound may plummet by 30% and 25% respectively.

Another option for Brexit is to hold the UK general election earlier. As the 75 Conservative MPs and the 10 Democratic Unionist MPs opposed the Brexit agreement, an early election can likely change the current congressional power structure, so it can avoid the vote being impeded by the minority. Although some polls show that the popularity of Conservative Party is still ahead the one of other parties, the actual election results often differ from the polls. Therefore, whether to hold the UK election earlier is just depends on the decision of Theresa May. Besides, for the second referendum, it will be difficult to achieve in the short term because it has not been supported by major political parties.

Even though the prospect of Brexit is unclear, the performance of financial markets and assets is stable, in which the UK stock market has increased by 0.4% in the past two days, and the pound has increased by 3.9% in 2019 and 1.9% in the past two days. It implies that the possibility of a no-deal Brexit is just 10% to 15% in the market’s point of view, while Goldman Sachs predicts that the chance of UK staying in EU is 35%.

Funds related to UK

Aberdeen Standard SICAV I – UK Equity Fund A2 Acc GBP
BlackRock Global Funds – United Kingdom Fund A2 Acc GBP
BlackRock Global Funds – United Kingdom Fund A2 Acc USD
Fidelity Funds – United Kingdom Fund A Dis GBP
Invesco UK Investment Grade Bond Fund A Dis GBP
Threadneedle Investment Funds – UK Smaller Companies Fund Retail Dis GBP
Threadneedle UK Corporate Bond Fund Retail (Gross) Inc GBP
Threadneedle UK Corporate Bond Fund Retail (Net) Inc GBP
Threadneedle UK Growth and Income Fund Dis GBP
Threadneedle UK Select Fund Retail Inc GBP

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