As was widely expected, the British Parliament has voted against Prime Minister Theresa May’s transitional deal. The defeat was a catastrophic one for the government, with a total of 202 Members of Parliament voting for the deal and 432 against (amounting to a 230-vote loss). By a significant margin, this constitutes the biggest loss for a sitting government in modern history.
The British Parliament is gearing up for a decisive vote on the Brexit deal on 15 January. If the deal passes, the path will be cleared and markets will stabilise. If the deal fails, market turmoil will continue, with the end result still up in the air.
Although it was set out that last week would have to be the week in which the EU and the UK would agree on the transitionary deal to leave enough time to arrange a smooth transition, this did not happen. Over the last weeks it had already become clear that a deal to be reached in October had become quite unlikely. There is significant pressure for a deal to be reached and to be approved by UK parliament before the end of the year. One of the key difficulties is the issue of the border with Ireland. The good Friday agreement rules out a hard border between Ireland and Northern Ireland. As Northern Ireland is part of the UK, the Irish-North Irish border would be an external border between the UK and the EU.
Financial conditions in the UK are supported by the depreciation of the pound. This is a crucial element for the UK market, as it consists mainly of large multinational companies.
• The UK could sink into a recession as early as the second half of this year, says NN Investment Partners. • Ireland, Belgium and the Netherlands are particularly vulnerable to Brexit-related consequences because trade with the UK delivers an important part of their income, a recent IMF report shows. • Foreign direct investments in the UK may decline and a weaker pound sterling may cut into the returns of foreign securities portfolios.
Joyce Tan, Portfolio Specialist Asian Debt at NN Investment Partners, explains why Asian Hard Currency debt could be an attractive investment amidst market turbulence.
The UK vote to leave the European Union has cast a dense fog of political uncertainty over financial markets. Much will depend on developments in the real economy.
Brexit has increased short-term market volatility as well as political uncertainty, especially in Europe. What is the impact on the Emerging Market Debt (EMD) asset class and our strategies?
Markets will likely remain volatile for now, but that does not mean that opportunities are absent. These will especially emerge should investor panic become extreme.
UK voters have chosen by a narrow margin to leave the European Union. The outcome of the UK vote is initially a major shock for markets, and could in the long run damage economic growth and cause more political risks. Brexit puts further pressure on risky assets, oil prices and the British pound. The vote could trigger further quantitative easing.