6 March 2019

Brexit – the impossible consensus of the British political class

In the BREXIT saga that began on 23 June 2016 in the aftermath of the referendum, daily drama and new plot twists are now the rule. This phenomenon, in addition to the fact that an event of this kind has never before occurred in the history of the European Union, is creating high levels of uncertainty that are difficult to overcome at this point, with only one month to go until the fateful date of 29 March.

What comes next?

In the BREXIT saga that began on 23 June 2016 in the aftermath of the referendum, daily drama and new plot twists are now the rule. This phenomenon, in addition to the fact that an event of this kind has never before occurred in the history of the European Union, is creating high levels of uncertainty that are difficult to overcome at this point, with only one month to go until the fateful date of 29 March.

As outsiders observing this British tragedy, the most striking feature involves the internal splits in each of the two main political parties of the UK, while, on the other hand, the Europeans have maintained their unity since the beginning of the negotiations. The inability to reverse this situation has plagued the negotiations of the British, who, being well integrated in the corridors of power in Brussels, had expected to be able to play on the habitual divisions of the Europeans.

What are the stakes?

On 25 November 2019, the European Union and the United Kingdom signed two documents, the Withdrawal Agreement, of some 600 pages, and the Political Declaration. The Withdrawal Agreement settles the bill of the past and establishes a transition period up to 31 December 2020, which marks the end of the EU’s current 7-year budget cycle. The second document provides the framework for the further negotiations on the future relationship between the UK and EU and allows for the possibility of a once-only extension of the negotiating period (Article 50) by a maximum of 2 years.

These documents must be ratified by the UK Parliament and then by the European Parliament. However, on 15 January 2019, the UK Parliament rejected this agreement by 432 votes to 202. Since then, the splits and infighting in the British establishment have multiplied, reflecting the difficulty for the United Kingdom to organize its own destiny.

A single clause is preventing ratification of the Agreement: this clause concerns the safety mechanism known as the “backstop”, which guarantees that no physical border will be re-established – even temporarily – between the Republic of Ireland and Northern Ireland. Brexiteers fear that this mechanism could become permanent and lead to the reunification of Ireland.

What are the possible scenarios?

  • Scenario 1: ratification of the agreement of 25 November 2018;
  • Scenario 2: the UK leaves the EU without an agreement (a “no-deal” Brexit);
  • Scenario 3: extension of article 50;
  • Scenario 4: cancellation of article 50 pending a second referendum.

After the vote against ratification of the Withdrawal Agreement on 15 January, we believe that Scenario 3 is the most likely outcome; this opinion has been further reinforced by the proposals submitted by Theresa May to Parliament on Tuesday 26 February.

What are the main economic consequences of each scenario?

Scenario 1, which provides for a transition period, gives the UK and Europe time to organize the future, without calling into question the principles of the single market and of the customs union. In other words, there would be no sudden disruption of the present organization of relations between the two parties, and withdrawal would proceed in an orderly manner, with the benefit of legal security. The impact of this scenario on growth forecasts for 2019 and 2020 remains limited. However, this scenario seems to be impossible today, in the drama series that Brexit has become. Nevertheless, Brexiteers (those wishing to leave the EU), fearing a new referendum, could still decide to ratify the “revised” Agreement, or, more precisely, they could accept a revised version of the Political Declaration, the only document that the EU is currently prepared to modify.

The second scenario, “hard” or “no-deal” Brexit, would mean that the United Kingdom leaves the European Union immediately, with no transition period. EU law would then cease to apply to the UK, and trade relations between the two parties would be placed overnight under the legal framework of the WTO. This scenario would be economically disruptive, because it would imply the immediate raising of customs tariffs and an increase in indirect production costs, due to production chain disorganization, delivery delays, additional health and safety tests and inspections and legal and contractual adjustments. A British recession would follow, and European growth would also suffer a negative impact of approximately 0.5%. Although the risk of this scenario is diminishing with the approach of 29 March, it cannot be totally ruled out with the new deadline of 30 June 2019 mentioned by Theresa May.

Scenario 3, an extension of Article 50, consists of the UK asking the EU to postpone the date of withdrawal in order to prevent a disorganized exit. The advantage of this scenario is that it prevents the chaos of the UK “crashing out of the EU” without a deal, but it also extends the related uncertainties, which are always detrimental to investment. The key variable here is the duration of the extension: if the postponement of withdrawal is “short and limited”, as in the case of 30 June 2019, the risk of a “no-deal Brexit” will not disappear. If Article 50 is extended until 31/12/2020, which is the solution envisaged by the EU, this would replace the transition period (which the UK terms the “implementation phase”) by an extension of the UK’s full membership of the EU until completion of negotiations on the future relationship, and the question of the Backstop would become irrelevant. By contrast, the British people would then have to elect new representatives to the European Parliament (MEPs) at the end of May. In terms of economic impact, this scenario is similar to scenario 1. Scenario 3 remains our central scenario, although at this stage we cannot predict which of the extension options will prevail.

Finally, scenario 4, the cancellation of Brexit, is currently a low probability: its chances will depend on the debates in the Commons, the evolving positions of the two main political parties in the face of the revolt of some of their MPs… and, above all, on public opinion.

What is the timetable up to 29 March 2018?

Predicting what will happen next is a perilous exercise, since further twists and turns, similar to those experienced since last Sunday (24 February), are entirely possible and unpredictable right up to the last moment, given the continuing power struggles between the Government and Parliament. Theresa May’s declaration of 26 February constitutes a major turning point, because MPs have finally obtained something that seems only logical in a parliamentary democracy and that they have been demanding from the start, namely the right to take the final decision.

  • 27 February: vote on a motion submitted by the government following the speech by Theresa May.
  • Before 12 March: vote on a modified version of the November Withdrawal Agreement
  • 13 March: if the Agreement is not ratified, a new motion will be submitted by the government: does Parliament accept an exit with no deal?
  • 14 March: if the no-deal scenario is rejected, another new motion will be submitted: does Parliament want a short and limited extension of Article 50?

However, the duration of this extension could be increased by an amendment proposed by MPs, especially if the “Remainers” (the MPs opposed to Brexit) unite their forces in the House of Commons. Any revision of the Agreement and any extension of Article 50 would have to be agreed by the Europeans and ratified by the European Parliament. On the first point, revision of the agreement, European leaders have already made their position clear: only the joint political declaration can be “slightly” modified. On the second point, extension of Article 50, although a postponement is in the interest of both sides, in order to avoid chaos on 30 March, the EU and European leaders will only accept an extension if, and only if, the prospects for the further process on the British side have become clear.

  • 20 and 21 March: European summit of the Heads of State and of government.

Risks of a “Hard Brexit” – impacts per sector

In the scenario of a hard Brexit (no deal), some sectors could be worse hit than others, in particular:


  • There is a risk of significant losses on a proportion of the revenue from financial services deriving from activities with the European Union.
  • We also identify a risk of degradation of assets if unemployment rises (increase in the cost of risk) and if income falls due to the reduction in volumes.
  • However, banks seem to have anticipated Brexit: the English financial entities are taking appropriate measures, in particular by setting up subsidiaries in the euro zone.


  • The supply chain with the continent would be severely hit: almost ¾ of components are imported from the EU.
  • Another risk relates to the potential major cutback in investment in the United Kingdom and the withdrawal of foreign companies, such as Hyundai.
  • Overall, the stakes are high, because the automotive sector in the United Kingdom represents about 20% of the European auto market, and approximately 80% of British automobile production is exported

Aviation & Defence

  • A hard Brexit could mean that the certifications of the European Union Aviation Safety Agency (EASA) are no longer valid for UK / EU traffic.
  • Risk of reduction in investment in the United Kingdom

Real Estate

  • The risk is also high in this sector, in particular in commercial real estate. Investors will demand a higher rate of return, which will lead to lower valuations.
  • Demand for office space in London risks weakening due to a slowdown in activity in the United Kingdom.


  • British pharmaceutical laboratories account for 48% of exports to the EU.
  • In the event of a hard Brexit, there would be a loss of access to the centralized authorization procedure (the European Medicines Agency would be moved to Amsterdam from its current location in London).
  • Laboratories would also lose their access to financing for Research and Development.
  • However, pharmaceutical labs seem to be acting with appropriate foresight and are expanding their stockpiles (Sanofi, GSK), in the prospect of longer lead times for testing and release of products, which could lead to a disruption of supply.


Our strategic positioning on Brexit risk

Fixed-income funds

  • Interest rates

The funds are adopting a neutral position in relation to their benchmark indexes, i.e. neutral in their sensitivity to British interest rates and exchange risk.

  • Credit

Economic slowdown is already under way in the United Kingdom, with or without Brexit. We are therefore adopting a prudent approach to the UK companies that are already battling against headwinds. Also, in the high-yield segment, our defensive outlook can be explained by prudent positioning on certain sectors, such as Retail, which are already suffering from declining momentum, especially in the UK.

  • Money Market

In our Money Market funds, our approach is very defensive relative to the Brexit risk. We limit our Uk purchases to the Money Market instruments (no British bonds), mainly below 6 months of maturity.

Equity funds

In our equity funds, we remain under-exposed to British risk.

With regard to our range of small & mid-caps, our UK underweight is solely the result of stock-picking, not of any macro-economic view.

Convertible funds

In our convertibles strategy, we are maintaining prudence concerning the United Kingdom and retaining our negative view of the pound sterling (GBP). This means that the GBP exchange risk remains partly hedged.

Asset allocation funds

We have not taken any specific management positions relative to our British exposures.

We are maintaining an exposure to the United Kingdom through our position on European assets. Yet, we underweight the euro zone, in favour of the American zone. Our positioning on the overall equity asset class is neutral in relation to the benchmark.

In addition, we do not have any exposure to the Pound Sterling.



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Edited by Groupama Asset Management – Headquarters: 25 rue de la ville l’Evêque, 75008 Paris – Website: www.groupama-am.com