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Investment views

Brexit defeat – what next?

17 January 2019
Author: Russell SilberstonPortfolio Manager

Russell Silberston talks to Lindsay Williams following the historic Brexit defeat, which saw MPs reject the plan by a majority of 230.


Lindsay Williams: Oh dear, oh dear, oh dear, Great Britain, United Kingdom – what a mess. It was boring at the start. Brexit became even more boring and now it has become really, really disturbing.

On the telephone now to unravel the extraordinary events of yesterday in the UK Parliament is Russell Silberston from Investec Asset Management in London.

The thing that really struck me when I woke up this morning, Russell, after seeing with a good deal of fascinated horror last night, is a quote from an EU official, who said “better a horrible ending than an unending horror”, which means that they are saying you know, well, Britain get on with it or UK get on with it and we are going to let you go without a deal. It is really, really disturbing to me.

Russell Silberston: Hello, Lindsay. Yeah, no, absolutely and, unfortunately, there are also quite a few UK politicians that think exactly that and the problem is we are trying to unravel ourselves from sort of 40-plus years of legislation and trading rules and frictionless cross-border trading. It is not as easy as literally just walking away. Hence sort of the never-ending negotiations.

Lindsay Williams: Exactly. I remember when I was at university and at school, I would always cram at the last minute. You know there is an exam coming up in 4 weeks’ time but you still go out and play football and you still do other things and watch telly and stuff and then right at the last minute you think I have got to really learn about this thing now because I have got an exam tomorrow. It seems to me that the Tory Government has done exactly that, headed by Theresa May. Another analogy is you know late homework – you say well, my dog ate my homework; I’ll give it to you in a week’s time. It is all so pathetic the way they have gone about it.

Russell Silberston: Yeah, I totally and utterly agree. Really, I think the annoying, disturbing thing about this is all of the potential problems with the sort of border between Ireland and Northern Ireland, which is one of the real sticking points on this, the government actually signed up to all of this back in December 2017, including our ex-Foreign Secretary, and it was obvious by early 2017 that this was going to be a massive headache and yet people still continue to bluster and bluff and say it’s all going to be fantastic.

Now, of course, reality is beginning to bite and the EU have played a very straight bat in all of this. They said the Irish border was one of their 3 main sort of sticking points. They have been completely upfront about it all and yet we are left doing our sort of Brexit homework on the bus on the way into school and it is very depressing.

I think more depressing is it was all absolutely inevitable if people had bothered to actually read what was being proposed, including our legislature. So for me it is depressing in that I think confidence in the UK’s parliamentary system is going to be hit massively and goodness only knows what the long-term ramifications of that are.

Lindsay Williams: As we pre-record this interview, I think the FTSE has probably just opened but, before we get to that, let’s have a look at the sterling because yesterday I saw it printing very close to 127, thinking it was going to break 127, the cable that is, and now I see it at 128.60. So there has actually been a rally in the pound. That I don’t understand as well. People would say well, it was baked in, of course, but I mean such a massive, massive vote of no confidence in the UK Government and Theresa May has been welcomed by the market.

Russell Silberston: So we have sort of been long of sterling for some months now and actually, if you look at it on a sort of broad Brexit picture, against our major trading partners as a trade-weighted index, sterling actually is back to the levels it was in our summer last year, August/ September time, in a broad range and what happened is – that is very interesting – at any one time, there is a range of possible outcomes priced into a market, from complete disaster to sort of a really positive outcome and what the market actually did yesterday initially was ‘oh, my goodness, this is a disaster’. Then you actually saw that the range of possible outcomes are actually shifting and that range of possible outcomes is shifting towards a more benign outcome than us crashing out without a deal and the reason for that is there is no parliamentary majority at all for the UK leaving the EU without a deal.

So if we discount that or put it as a very low probability, the hope of the market therefore is that if the PM seeks cross-party thoughts on this, cross-party consultation, then actually we are going to have a slightly sort of softer – in the lingo of Brexit, a slightly more favourable – outcome and, hence, sterling rallies and that I think is what we saw yesterday, what we also believe will continue to happen.

Lindsay Williams: I wouldn’t like to be a currency trader on this morning, having to work out to your bosses what you are going to do strategy-wise on the proprietary trading desk for the next couple of weeks. I would do absolutely nothing and just sit on my hands because we don’t know what is next. What is next? This is the question I am asking you: is there going to a general election; is there going to be a vote of no confidence in Theresa May and her government; is there going to be a second referendum; or are we just going to drift in inexorably towards those rocks which are the rocks of a no-deal Brexit?

Russell Silberston: The latter I would say is – I don’t want to rule it out but it is less than a 5% probability. As I say, there is absolutely no majority in favour of that and therefore I don’t think it is going to happen.

So yeah, what happens next? The Labour Party obviously shouldn’t have called a vote of no confidence in the government. The only way we can have an election is if the government loses that and we start to create a new working government and then, under the sort of fixed term parliament legislation we have here in the UK, an election isn’t actually due until 2022.

So the procedure to bring forward an early election is that either the incumbent asks for one as the PM infamously did last year, or he may lose the vote of no confidence. That vote of no confidence is going to happen today I believe but they are going to lose. The Conservatives, they are not in a strong position but the Labour Party – so if you just toss up the opposition here in the UK, the Labour Party, the Scottish National Party and the Liberal Democrats 302 seats, the Conservatives 317 seats.

So you know it will be close but everyone is highly confident that they will win, especially as Tory MPs do not want to see a fairly left wing Labour leader elected to government. So they will lose that and then what happens essentially is that the PM is under an obligation to come back with Plan B by Monday, which is obviously no time at all when we are talking about the future of our country.

Yeah, so then it’s Plan B, which is essentially we go back to the EU and try to get some concessions out and I would – everyone cast their minds back to the Eurozone crisis. You know we were wrongly edged in the Eurozone crisis and you know the EU always does things at the last moment and in moments of panic. It feels that we are there now and so I wouldn’t be surprised if: (1) we are going to get an extension of the exit process, so the March 29th date falls away; and (2) I suspect we might get some slight concessions on the so-called Irish backstop, which is very technical but very, very important and, If that happens, the vote comes back, especially if we get cross-party consultation, and it eventually passes.

Lindsay Williams: You sound very sanguine about it. You seem to think that reading the notes on the bus is going to actually come to some kind of satisfactory outcome, i.e. a B-minus or a C rather than a big fat F.

Now what are you doing on the desk of Investec Asset Management at the moment? Are you sitting on your hands and waiting or are you saying right, we are going to back the fact that something is going to be – some rabbit is going to come out of someone’s hat and therefore sterling is going to go up and the gilts will do well, etcetera? What are you doing?

Russell Silberston: Yeah, so actually we have (in relatively small size because of the uncertainty) been positioned for a positive outcome for I would say 2-3 months now and the reason for that harks back to that earlier comment I made about a range of possible outcomes. We realised some time ago that the worst case Brexit, a sort of messy exit, is highly unlikely and so we think the range of possible outcomes shifts more positively towards the UK.

So we have a long in sterling (it is cheap) and we are looking to buy more and we have a full position. So we are positioned for high yields in the UK because we think, as soon as we get clarity, we are going to see an economic bounce and interest rates will begin to rise. You know I wouldn’t want to underestimate just how the UK has ground to halt, Lindsay. Nothing is getting done. No one is making any commitments. When the uncertainty lifts, you should see a bounce in activity, so we are positioned for that.

Lindsay Williams: The Bank of England, in its role as scaremonger, has been really, really scaring me with its forecasts for inflation, for unemployment, for GDP plunging from its current level. That is something that is almost political in trying to scare other MPs to vote in Theresa May’s favour but do you hold any store in what the Bank of England has been saying in the last couple of days?

Russell Silberston: I think if we are literally left on the 29th March with no new trading agreements in place and actually immediately resort to trading on WTO standards, without a doubt you would have an enormous economic impact. So you know I think the Governor has been right to warn about that and he was also doing it in the context of trying to keep the financial system safe. I mean that is one of his roles and he was saying okay, look, if the worst case happens, what is the worst possible thing we can think up and, if that happens, what happens to our banking system? That is really where he was coming from.

He absolutely – you know it is his – no doubt in my mind, if we had a so-called hard Brexit, the economy would literally collapse in a heap and obviously would recover eventually but you would have a massive dislocation and that is also why – MPs understand that and that is also why it is not going to happen. So that is why we are sort of reasonably sanguine in trying to sort of sail through the stormy sea.

Lindsay Williams: Well, if Mark Carney is right, then property prices are going to fall 30% if there is a no deal Brexit or a very, very hard Brexit indeed. So anyone that is not on the property ladder, maybe you can look forward to that as one silver lining. Russell Silberston, on a very disturbing morning, thank you very much for your time. Russell Silberston is from Investec Asset Management in London.

Important information

Investment involves risks. Past performance figures are not indicative of future performance.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is not an invitation to make an investment and should not be construed as advice. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Investec Asset Management.In South Africa, Investec Asset Management is an authorised financial services provider. In Hong Kong, this content has not been reviewed by the SFC and is issued by Investec Asset Management Hong Kong Limited. In Singapore, this content is issued by Investec Asset Management Singapore Pte Limited (Co. Reg. No. 201220398M).

Russell Silberston
Russell Silberston Portfolio Manager

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