An update on Brexit for those who don’t care

A British electorate, as bored with their national politics as we are, gave two strong mandates in the December 12 election. Boris Johnson has won the biggest Conservative majority since 1987 serving a crushing defeat to the opposition Labour and Liberal Democrats which leaders will step down in shame. North of the Hadrian wall, Nicola Sturgeon, the leader of the Scottish Nationalist party (SNP), is predicted to win 48 out of 59 Scottish seats at Westminster. (According to the BBC, the conservatives obtained 43.6% of the vote which was smack in line with estimates. This is yet one more example of how an electoral system gives a large majority to a minority of voters).

On the one hand, Boris Johnson may say proudly that Brexit is now “irrefutable, unarguable” as the public has embraced “Get Brexit done”. On the other hand, armed with their own strong mandate, the SNP calls for a second referendum on the independence of Scotland in 2020 which PM Johnson will most likely reject. Life is seldom simple!

The Union will be tested by the Brexit divide especially since the Scottish public, unlike the English electorate, is all too aware that there is no easy solution to keep the Good Friday Agreement unless Northern Ireland remains in a custom’s union with the EU. Scots may not be willing to accept a solution where Northern Ireland does remain, and they do not. The probability of Irish reunification may also be higher as a result of this issue. Unless you believe that a United Kingdom without Scotland and Northern Ireland is stronger, and surely some people in England would agree, the Tory landslide seems to be a pyrrhic victory.

Granted many things may happen during the transition period that will most likely get under way after January 31 2020, as we assume that the UK and the EU parliaments will both pass the Withdrawal Agreement Bill. Soon after Brexit day, trade talks will resume. There’s a very short period until December 31, 2020 to reach an agreement. An extension to the transition period needs to be formalized before July 31st. The EU apparently wants a sequence of items to be negotiated leaving no time in eleven months for the negotiation of a free trade agreement. You can already hint that this is all far from a fait accompli. And yet Johnson insists on painting himself into a hard Brexit corner by insisting there will no extension to the negotiations’ initial deadline.

We are going to make a bold forecast. These complications may very well leave the UK in a customs union with the EU. In order to sweep through traditionally Labour constituencies, the Tories have also embraced an expansionary fiscal policy. Theirs has been a barbell approach: embrace Brexit to defang the Brexit Party to their right while embracing some of Labour’s post-austerity spending plans. Johnson’s Conservative Party has thus become a staunchly populist organization modelled on the US Republican Party.

Indeed, moderate commentators conclude that Johnson’s masterful handling of the Brexit party gives him enough political room to manoeuvre for a centrist compromise on Brexit. This may be an optimal solution for everybody except for those allies and enemies of the EU who unabashedly seek its diminution. But how long before the British electorate asks the GBP 350 million a week question: what has been gained by remaining in a customs union while giving up the UK’s moderating presence in the council and the commission, and representation in Strasbourg?

The initial market reaction to the Tory victory is characterized by a further rally of sterling and UK stocks. Many will look at the UK market as a great opportunity as it has underperformed most global indices year to date. They may be making a mistake because other UK indices such as the FTSE 250 (+24.7% YTD) have performed in line with many other markets around the world. The FTSE100 may have lagged largely because its constituents are heavily tilted towards the Oil & Gas, Financial, and Mining industries which have not had a great year.

In fact, since June 23, 2016 (the date of the referendum) sterling has dropped 10.5% vs the dollar and 9% vs the mighty euro. The FTSE 250 index (which is a better reflection of the UK economy than the FTSE 100) is up 40.68% (10.5% CAGR) in that same period. This solid performance does not compare too badly with that of the MSCI Euro Index +43.35% (11.12% CAGR). While the British Index does trail the S&P500 for that period, who doesn’t? Most indices don’t have the honour of hosting Apple, Microsoft, Alphabet, or Amazon. These stocks are the weapon missing in many European funds so loyal to value principles that no longer seem to offer sufficient reward for the risk taken. Before you jump into UK stocks as you’ve been told to do, remember that some of the same issues that bogged down decision will remain in place for now.

Johnson’s platform promise of larger budget deficits may or may not have an impact on Gilds and sterling in the near term, but it’s bound to have some impact over time. Soon enough we may see a spat between the two amigos bound by the special relationship because of American accusations of currency manipulation. Indeed since 1971, which is as far back as Bloomberg provides data on cable for two and a half grand per month, Sterling has depreciated by 45% vs. the greenback.

Conversely, should English (and perhaps Welsh) conservatives’ desire to be masters of their own destiny weigh more in the negotiations than the Union itself, the break up with Scotland and Irish reunification will be seen as a salvo for independence movements around Europe. This may be the real downside of Brexit, a regression to a more atomized and nationalist Europe which as you all know worked so well in the past. The very powerful enemies of the EU, ranging from US Tea Party sympathizers to anti-liberal regimes will be delighted. The other important lesson from Brexit for the EU is that the British public has not been persuaded to remain The only upside such a scenario offers is the possibility of having to move to the US where one can be free of the constant drudgery which navigating the World Wide Web has become on these shores because of misguided privacy policies.

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