Buzz keeps building about the potential for a “no-deal Brexit,” meaning a disorderly departure from the European Union by the United Kingdom, without an agreement on future trade relations.
British stocks haven’t suffered a major hit due to the hubbub, even as analysts warn of the potential for severe economic disruption. However, fears about the breakup may start to grow as investors return from a late-August U.K. holiday and Labor Day in the U.S., according to one smart strategist.
“This is going to get quite nasty quite quickly after everybody comes back from the holidays,” says Helen Thomas, CEO and founder of Blonde Money, a macroeconomic consultant in London. “I have been calling for September as the first big wobble, and then I think it really picks up into the end of the year.”
Thomas views a no-deal Brexit as the most likely outcome, and she sees U.K. equity benchmarks slumping in coming months as uncertainty rises. Brexit, with an agreement or not, is slated to occur March 29, or nearly three years after Brits voted to leave Europe’s big trade bloc.
The mid-cap FTSE 250 MCX, -0.22% could fall about 13% from recent levels to 18,000, Thomas says. The FTSE 100 UKX, -0.62% — not the best national barometer because its components generate most of their revenue abroad — could drop roughly 10% to 6,800, she adds. Banks and other financial firms could be whacked hard, as could consumer stocks, according to Thomas. Defense companies and some other traditionally resilient sectors might see less selling.
“Part of the reason that ‘no deal’ is quite possible is that there are a number of different stages” to the process of reaching agreement, Thomas says. A failure could come because U.K. and EU negotiators hit an impasse, or because the U.K. or EU parliaments refuse to back a deal, she says. It’s also troubling that the governing Conservative Party, headed by Prime Minister Theresa May, “can’t agree with itself” on its Brexit position, while the opposition Labour Party’s stance isn’t clear either, Thomas adds. And the autumn could provide stumbling blocks due to EU summits and annual conferences for the U.K.’s political parties.
Investors think the British “might be a bit awkward sometimes, but we’re sort of sensible, economic, rationale people,” Thomas says. “We have benefited from that kind of ‘rationality dividend,’ and it’s only just beginning to start to shift.”
Some analysts don’t want to count out this rationality. ING strategists, for example, recently said they were “slightly uncomfortable” betting on more drops for the Brexit-battered pound GBPUSD, +0.0384% . “While the perceived odds of a no-deal are high, this may be partly due to political games and posturing,” they wrote.
“The calculation seems to be: ‘It’s a lot of noise. They’ll come to an agreement,’” says Thomas, who has worked in U.K. politics as well as for State Street and other big financial institutions. “My calculation is: There’s a lot of noise. That means we cannot come to an agreement, and therefore the market will have a significant shift in pricing.”
The Blonde Money strategist is hardly alone in expecting a no-deal Brexit. In early August, the U.K.’s international trade secretary, Liam Fox, gave a 60% chance that the country will crash out of the EU, and a recent KPMG poll of Brits found 54% viewed that scenario as likely.
To be sure, this might end up being a good time to start wading into the British pound, given the EU’s tendency to reach eleventh-hour deals, as some suggested in a Barron’s column a month ago. The EU’s top Brexit negotiator, Michel Barnier, offered an olive branch Wednesday, suggesting an agreement was possible. But this also could be the calm before a market storm.
This report also appears at barrons.com.
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