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Current Perspectives
Brexit: Should We Stay, or Should We Go?
At a glance
• The Arduous Road to Brexit: Never expected • Investment Implications: The TD Wealth to be an easy transition, Britain’s exit from the Asset Allocation Committee (WAAC) believes European Union (EU) has involved a series of there will be minimal direct impact for North complex and often contentious negotiations. American investors, regardless of the Brexit outcome. The WAAC is currently underweight • Possible Conclusions to Brexit: Leave with International Equities in its portfolios, due in a deal, crash out without a deal, or remain part to the Brexit overhang. following a possible second referendum.
The arduous road to Brexit Never perceived as an easy exodus, the Brexit affair has involved a series of complex and often strained The United Kingdom’s (UK) dissolution drive from the negotiations, that has delivered cringe-worthy EU remains embroiled in gridlock, despite the British political theatre for chagrinned British citizens. Some electorate voting to separate from the Union roughly remain hopeful that a deal will be stuck by the latest three years ago. In the 2016 Brexit referendum vote, the October 31, 2019 extension; others are skeptical. While we ‘leave the EU’ side edged out the ‘remain’ camp 51.9% to can’t predict a final outcome, we will explore the events 48.1%, while exposing deep regional divisions across the that have led to the current Brexit impasse, and potential UK. In large part, these divisions remain today, and reflect investment implications, regardless of how events unfold. the conflicting views of constituent representatives within the British legislature that have thus far failed to deliver a Brexit resolution.
Current Perspectives | July 2019 | Page 1 Deadlines old and new as PM and leader of the Conservative party. As the party works to appoint a new leader, May’s successor In October 2016, PM Theresa May, who assumed will likely face the same daunting task of attempting Conservative leadership following David Cameron’s to maneuver a Brexit agreement through the British resignation, began the formal process of initiating legislature while securing Brussel’s support, or face the Britain’s departure from the EU. On March 29, 2017, the increasing prospect of a no-deal Brexit on October 31. two-year countdown to the Britain-EU divorce was set The new leader is expected to be appointed by the end for March 30, 2019. of July 2019.
May successfully negotiated a Withdrawal Agreement with the EU in November 2018 but failed repeatedly to obtain consensus on the deal within her own legislature - a requirement for Brexit to proceed. Legislative Brexit – short for disagreement centred on the structure of the UK’s post-Brexit customs and trade arrangements with the “British exit” eurozone. With no deal in place, EU leaders agreed to a word referring to extend Brexit to October 31, 2019 – a second extension to avoid a no-deal exit scenario. the United Kingdom’s
On May 24, 2019, following three failed attempts to decision to leave the persuade the House of Commons to back her Brexit European Union. package, Theresa May announced her resignation
Are we still Brexiting? divided, however the ‘remain’ side has garnered broader support compared to 2016. Poll figures indicate that 48% Amid political turmoil and public angst arising from now favour remaining with the EU versus 45% in October the ongoing Brexit affair, many may question whether 2016. Interestingly, at 44%, Brexit support is virtually breaking up is really worth it? Post-referendum public unchanged, increasing a mere 1% from 2016.1 (Chart 1) opinion polls indicate that UK citizens are still very much
Chart 1. Poll: Should the United Kingdom remain a member of the European Union, or leave? (Asked after Referendum) As at June 20, 2019
Remain a member of the EU Leave the EU Don’t know
8%
44%
June 2019 48%
11%
43%
45% October 2016
0% 10% 20% 30% 40% 50% 60%
Source: https://whatukthinks.org, BMG Research, Field work dates: 19 October 2016 - 20 June 2019, Data from United Kingdom, Great Britain. Sample size 1546, Age 18+
Current Perspectives | July 2019 | Page 2 Do the polls point to regret over the initial break-up decision or does the steady support for Brexit suggest that many Britainers remain fed-up with the failed process and are eager to leave, deal or no deal? Without the ability to foretell the future, we will rely on time for answers, but for now, we’ll examine the potential outcomes from a broader lens.
What the future might hold: Possible conclusions to the Brexit saga The October 31, 2019 deadline looms large for an exit deal to be finalized; however, a third extension is possible 2. UK Leaves EU - No Deal: This scenario remains should time run out. Britain still faces several potential a distinct possibility. If PM May’s successor and outcomes to Brexit, and below is a summary of some legislative colleagues can’t get their house in order key scenarios. by October 31, and no further extensions are granted, the result could be a no deal departure. The risk 1. UK Leaves EU - With Deal: Some form of agreement of this outcome creates significant uncertainty would need UK parliamentary ratification and for companies operating in the UK as it remains Brussels’ stamp of approval to clear way for a more unclear what rules would govern trade with Europe in orderly Brexit. Key issues that need to be resolved this scenario. include the rules that would govern trade with 3. UK Does Not Leave - Remains Part of EU: This Europe, the status of European workers in the UK, outcome would likely occur as a result of a ‘remain’ and the treatment of the border between Ireland vote from a second referendum. It is also possible that (a member of EU) and Northern Ireland (part of the the UK stays because they can’t agree on the terms UK). Unfortunately, no plan has been able to garner of departure, and the result is a stalemate that lasts majority support as views remain sharply divided on for years. these issues. Brexit investment implications: WAAC’s view Despite the UK equity market recovery over recent The next big test may be the 2020 U.S. election, where months, an economic overhang remains over the the range of policies being advocated by Democrats and economy due to Brexit uncertainty. Real estate has Republicans is unusually wide. We will be watching with experienced a prolonged period of weakness, with values great interest as the drama unfolds. declining approximately 10% over the past few years. The British pound (Chart 2) is at the lower end of its trading Brexit uncertainly, has contributed to Eurozone range in recent years, while investment in the country and economic instability, and negatively impacted the stock valuations remain depressed. British pound as shown in the chart.
However, in terms of investment implications, we expect Chart 2. GBP to USD Exchange Rate minimal direct impact to North American investors regardless of how Brexit unfolds. The UK economy 1.75 accounts for only 2.2%2 of global Gross Domestic Product and is a small market for most U.S. and Canadian 1.65 companies. We are underweight International Equities in our portfolios, due in part to Brexit politics, sluggish 1.55 growth throughout the Eurozone, and also because Brexit Vote the European equity market has lower exposure than 1.45 the U.S to sectors driving growth and innovation, like technology. Longer-term, we remain concerned that 1.35 societal divisions driving the Brexit debate may also become more prominent in other countries, including the 1.25 U.S., France or Italy. This could create an environment where economic policies become volatile, and in turn, 1.15 result in lower investment, slower growth and increased June 2014 June 2015 June 2016 June 2017 June 2018 June 2019 market uncertainty. Source: Bloomberg Finance, L.P.
Current Perspectives | July 2019 | Page 3 1 https://whatukthinks.org, BMG Research, Field work dates: 19 October 2016 - 20 June 2019, Data from United Kingdom, Great Britain. Sample size 1546, Age 18+ 2 https://www.imf.org/external/datamapper/PPPSH@WEO/OEMDC/ADVEC/WEOWORLD. The information contained herein has been provided by TD Wealth and is for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS. The TD Wealth Asset Allocation Committee (WAAC) is comprised of a diverse group of TD investment professionals. The WAAC’s mandate is to issue quarterly market outlooks which provide its concise view of the upcoming market situation for the next six to eighteen months. The WAAC’s guidance is not a guarantee of future results and actual market events may differ materially from those set out expressly or by implication in the WAAC’s quarterly market outlook. The WAAC market outlook is not a substitute for investment advice. Bloomberg and Bloomberg.com are trademarks and service marks of Bloomberg Finance L.P., a Delaware limited partnership, or its subsidiaries. All rights reserved. TD Wealth represents the products and services offered by TD Waterhouse Canada Inc., TD Waterhouse Private Investment Counsel Inc., TD Wealth Private Banking (offered by The Toronto-Dominion Bank) and TD Wealth Private Trust (offered by The Canada Trust Company). TD Asset Management Inc. is a wholly-owned subsidiary of The Toronto-Dominion Bank. All trademarks are the property of their respective owners. ® The TD logo and other trade-marks are the property of The Toronto-Dominion Bank. (0719)