Brexit: Political Pressure Builds

 In Market and Investment Insights

Paul O’Connor, Head of Janus Henderson’s UK-based Multi-Asset Team, considers the current state of Brexit given a six-month extension to the deadline for Britain to leave the European Union.

The recently agreed-upon extension of the Brexit deadline to October 31, 2019 removes some of the immediate pressure on the negotiations and market concerns surrounding the topic. It does not, however, alter the key challenges facing the process, nor does it provide any greater clarity on the direction in which Brexit will ultimately unfold. All options are still on the table, from no deal to no Brexit.

May Brexit?

The extension still leaves room for the UK to leave the European Union (EU) before the October 31 deadline if a withdrawal agreement is ratified before European Parliament elections take place in late May. Otherwise, the UK will participate in these elections, and the October 31 deadline will become the next key milestone on the long and winding Brexit road.

The potential for a May 2019 Brexit hinges on the ongoing cross-party negotiations delivering an agreement that the UK Parliament can approve in the next few weeks. The challenges here remain formidable. For one thing, it is questionable whether the Labour Party is incentivized to deliver a solution to a problem that is so clearly damaging Conservative Party unity. Second, it is hard to envision a significant number of Conservative members of Parliament (MPs) supporting the sort of deal that would be acceptable to the Labour Party. If voting patterns in the recent parliamentary indicative votes are anything to go by, the two parties are still a long way from agreeing on any form of Brexit.

MP Support for Brexit Options in Parliamentary Indicative Vote

Source: House of Commons Library, as of 4/3/19. Numbers represent MPs voting for each option on votes held 4/1/19.

One consequence of the Brexit deadline being shunted six months down the road is that it broadens the scope for political developments to further complicate the process. The two big contenders here are the possibility of a Conservative Party leadership contest and an early general election. Each of these could inject significant new political energy into Brexit and potentially shift the current meandering, directionless process onto a more decisive path.

May Exit?

The extra time provided by the Brexit extension presents an opportunity for the Conservatives to hold a leadership election if that is a direction they want to take. This is certainly a conceivable outcome in the months ahead, given Prime Minister Theresa May’s unpopularity among her party and partners in Northern Ireland’s Democratic Unionist Party (DUP). Senior DUP politicians have been scathing about Ms. May’s recent political decision making and are in a strong position to demand a change of leadership given that a loss of their support would eliminate the government’s Commons majority. While party rules do not allow another leadership election until December, Ms. May looks set to remain under persistent pressure to resign before then. This pressure will probably intensify further if the party suffers heavily in the upcoming EU elections, which seems very likely.

A change in Conservative Party leadership could set off a chain of political events that ultimately has a big impact on the Brexit process. First, it is quite likely that the next party leader will be a Euroskeptic who will take a more aggressive stance in EU negotiations, potentially reviving the threat of a no-deal Brexit. This, in turn, could cause a meaningful splintering of the parliamentary Conservatives, with disenchanted moderate MPs resigning from the party.

General Election?

Another potential spillover is that a change of leadership in the Conservative Party would probably increase the chance of the UK holding an early general election in 2019. This decision could be made by a new leader in an attempt to secure a clear mandate from the broad electorate. Alternatively, if leadership change or anything else does split the Conservatives, this could erode the government’s parliamentary majority, giving the Labour Party the opportunity to call for a vote of no confidence in the government, opening another possible route to a general election.

A general election could be a game changer for Brexit, given that it would effectively offer the country the chance to choose between two highly polarized visions of the UK’s future relationship with the EU. While a Conservative manifesto would probably focus on a “clean break” strategy – a hard version of Brexit from an economic perspective – the Labour Party would almost certainly offer another referendum and a chance to vote to revoke the whole process.

Something Better Change

A general election would not in itself guarantee a more decisive Brexit strategy, but it does increasingly look like the most plausible way of breaking the current deadlock. Unless cross-party talks deliver a surprise agreement in the next few weeks, it seems fair to conclude that the Brexit process has hit a dead end. Parliament has failed to form a majority on any sort of Brexit, and the government is hamstrung by its efforts to preserve Conservative Party unity.

While this unstable equilibrium could, in theory, be maintained for many months – even leading to an extension of the extension and a seemingly unending Brexit process – political pressures are building. Those pressures appear ready to erupt at some point and jolt the UK toward making a real choice on this tricky topic.

The opinions and views expressed are as of the date published and are subject to change without notice. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. No forecasts can be guaranteed. Opinions and examples are meant as an illustration of broader themes and are not an indication of trading intent. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. Janus Henderson Group plc through its subsidiaries may manage investment products with a financial interest in securities mentioned herein and any comments should not be construed as a reflection on the past or future profitability. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use. Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value.

C-0419-23681 04-30-20

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