These are all the Brexit possibilities you need to know about

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With Brexit negotiations now underway, and as Parliament faces its most complex set of Bills in 50 years, Seven Investment Management (7IM) has published its new ‘Brexit scenarios’. With a ‘soft Brexit’ looking like the most likely scenario, what are the implications for investors?

Chris Darbyshire, Chief Investment Officer, 7IM said: “A softer Brexit is now on the cards given the Conservative’s reduced hand. Sterling looks likely to strengthen and economic uncertainty to moderate in the long-term, and this has implications for investors. Those with portfolios massively tilted towards UK assets may well be left wishing they’d diversified.

“The strong performance of large-cap UK stocks and UK bond markets over the last year has been flattered by the Brexit vote. The UK stockmarket benefited from the dramatic decline in Sterling following the vote, whereas gilts surged on lower growth expectations and lower rates. A softer Brexit, leading to stronger Sterling, would mean investors give back those gains.

“Short term pain is the catalyst for soft Brexit: British economic growth is slowing, inflation has surged, and that inevitably eats into people’s wealth. UK consumers are now losing 1% of their income a year to inflation. Meanwhile, consumers are spending beyond their means even more than before the credit crunch.”

 

Scenario 1: Wobbly Britain Made Whole – Sterling strengthens

·        UK political uncertainty prevents progress in negotiations…time is running out.

·        EU becomes frustrated by Britain’s inability to negotiate with a clear mandate approved by a majority in Parliament and popular with the electorate.

·        Successful lobbying by EU exporters on Britain’s behalf.

·        EU offers Britain a take-it-or-leave-it, but reasonable, EFTA-like end-game with transitional phase.

·        Parliament’s best move is to approve, hoping it can negotiate better terms in future.

Scenario 2: Fortress Europe – dismal scenario for the Pound

·        UK political uncertainty prevents progress in negotiations… time is running out.

·        EU becomes frustrated by Britain’s inability to negotiate with a clear mandate approved by a majority in Parliament and popular with the electorate.

·        EU loses patience, decides to cut Britain loose. Good riddance!

·        Take-it-or-leave-it deal which offers Britain what the EU thinks it wants: WTO status plus a few carve-outs that Europe is particularly sensitive to.

Scenario 3: Hard Road to Soft Brexit – good for Sterling

·        May’s Hard Brexit strategy has been rejected in the polls.

·        Economic deterioration continues. Real incomes are hit. Businesses begin to lobby for Brexit certainty.

·        Tories’ reputation on economy now questioned - popular and MP discontent leads to second election.

·        Creates political conditions for UK concessions – emphasis on economic stability and reducing inflation. Both parties fight campaign with plan for Soft Brexit.

·        UK ends up in EFTA – somewhat spun by the government to still be Brexit (no ECJ, allowed to make bilateral agreements). Transitional period.

Scenario 4: Dunkirk Spirit – very bad for Sterling

·        Significant process risk arises from general election result, negatively impacting the UK’s negotiating strategy.

·        Intransigent EU negotiating position and aggressive demands cause negotiations to break down, almost from the outset. No major issue can be agreed on. Exit bill generates extreme ill-feeling.

·        Popular discontent leads to broader anti-EU sentiment, even from Remainers. Thank goodness we’re leaving!

·        Economic pain tolerated – WTO status becomes default option.

Scenario 5: U turn: the Sequel– very good for Sterling

·        Surprise general election result makes it politically, economically and bureaucratically expedient to soften the UK government stance.

·        Cross-party Brexit committee is convened to ensure smooth negotiations.

·        Negotiations target minimal disruption, something that pleases both sides. UK to stay in single market, accept freedom of movement with minimal restrictions. Contributions to EU budget to continue.

·        UK economic slowdown continues, which is now conveniently blamed on Brexit. Clear majority of population turns against Brexit, especially as it’s now seen to offer no real advantages.

·        Article 50 revocation movement builds in UK. EU offers UK the chance to revoke Article 50. UK parliament votes to accept.

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