After yesterday’s resounding parliamentary defeat, the UK’s future relationship with the European Union (EU) remains deeply uncertain.
The deal that had been agreed between Prime Minister Theresa May and the EU has proven unpopular across the spectrum of the Leave/Remain supporters. And the deal’s rejection now leaves the government with a short window to attempt to work with other political parties to find a deal that more MPs can agree to.
May’s government will today face a vote of no confidence in parliament. They’re widely expected to win that vote, but if they were defeated a general election appears likely.
During a period where markets have been volatile, an extension of this uncertainty is unlikely to be welcomed. Nevertheless, the widespread expectations of parliament rejecting the Brexit deal were being factored in by markets over recent days. For investors, what ultimately matters is what happens next.
Is the UK heading for a no deal?
|Scott Ashworth, Technical Research Manager at Skipton Building Society|
"The heavy defeat of May’s Brexit deal with the EU certainly means no deal remains a possibility", explains Scott Ashworth, Technical Research Manager at Skipton Building Society. Whilst the long-term implications of a no deal cannot be accurately forecast by anyone, it’s highly likely there would be some initial disruption.
"A no deal Brexit would trigger even greater market uncertainty, at least in the short-term, because no one really knows what would happen", continues Scott. "The value of UK Sterling – which went up after the parliamentary vote – may fall further than it has.
"It’s not just those of us here in the UK who could feel the effects of a no deal – global assets could be impacted, at least until another major global development diverts attention elsewhere. In the UK, the impact would be felt for longer – potentially affecting all asset classes.”
Can a better deal be made?
The scale of May’s parliamentary defeat indicates just how unpopular her deal was across the House of Commons. With such a wide range of opinions over how the UK should leave, the government certainly has its work cut out finding cross party consensus.
As far as markets are concerned, any positive development towards finding an agreement is likely to boost the value of Sterling and UK assets. But as Scott warns, there might still be bumps on the road. “A rise in currency would help some assets, but investors who have benefited from the fall in Sterling – such as those with global assets – might find some of their gains are eroded, or at least find subsequent returns are lower.
“Ultimately, however, any clarity achieved over the UK’s future relationship with the EU would find favour. Markets hate uncertainty, and getting to the point of knowing what, exactly, Brexit is going to look like can only help.”
Although the UK is scheduled to leave the EU in 72 days, this uncertainty might yet go on for some time. For example, there’s talk of extending the Article 50 deadline, or we may even see a second referendum.
How should investors react to this uncertainty?
Whatever the future holds for the UK, it’s important to retain focus on your long-term reasons for investing. To an extent, there will always be uncertainty in markets, but that can also create opportunities – Brexit will be no different.
|Mark Elliott, Skipton’s Head of Financial Advice Risk and Research|
Mark Elliott, Skipton’s Head of Financial Advice Risk and Research, states, “It’s at times like this that having a balanced investment portfolio can support your long-term future, as your money can be exposed to different assets and regions – including both UK and global holdings. It also means a relatively short-term event like Brexit needn’t derail your plans."
From time-to-time markets will experience testing periods like they have of late. But whilst past performance is not a guide to future returns, history has shown that the longer you are able and prepared to leave your investment, the higher the potential return.
Mark concluded, “There will inevitably be winners and losers from what is ultimately agreed over Brexit – not all parts of the market will benefit or struggle. This is a time when patience is an important trait for investors.”
How might UK financial services be affected by Brexit?
The Financial Conduct Authority (FCA), which regulates most UK financial products, including investments, has issued guidance on how Brexit might affect your products and services.
- The FCA is preparing for all possible outcomes to make sure financial services function before and after December 2020 (the UK is currently scheduled to operate under EU law until this point).
- Your financial service providers are expected to contact you if they need to make any changes to your products.
- The Financial Ombudsman Service and Financial Services Compensation Scheme will continue to cover customers UK providers operating in the UK.
In terms of your Skipton investments, we will of course provide any updates in due course.