Η UBS σχολιάζει την ανάληψη της πρωθυπουργίας από τον Μπόρις Τζόνσον
Boris Johnson, a leading proponent of Brexit in the 2016 referendum, will
take over as the next UK prime minister. Mr. Johnson has pledged that
the UK will leave the EU as scheduled on 31 October, with or without a
deal. Johnson’s win over rival Jeremy Hunt, the foreign secretary, was widely
expected. As a result, the market reaction was muted with sterling, 10-
year yields, and the FTSE 100 all little changed from levels prior to the
announcement. But sterling has been the weakest G10 currency over the
past three months versus the US dollar on rising concern over the possibility
of a no-deal Brexit.
What comes next?
The market is now pricing a roughly 50% chance of a no-deal Brexit, based
on our estimates. Concerns about a no-deal exit have increased as the new
PM has repeatedly promised to leave the EU without a deal if a satisfactory
agreement can’t be reached. In addition, EU officials – including newly
elected Commission President Ursula von der Leyen – have indicated that
there is no room for compromise on major sticking points, including the
Northern Ireland backstop. The incoming EU Commission president has also
indicated she wouldn’t stand in the way of an extension of Brexit day.
We do not believe it is possible to forecast the ultimate outcome of the Brexit
process, and we don’t attempt to do so. But we believe that in the shortterm
the market is overstating the risk of a no-deal Brexit.
Even if Prime Minister Johnson is willing to countenance a no-deal exit, he
faces various barriers. The Conservative Party currently lacks a majority in
parliament to push through its preferred option. The party itself is not united,
with several leading lawmakers – such as Dominic Grieve, the former attorney
general – opposed to a no-deal Brexit. Mr. Grieve has said he would be willing
to vote against the government in a vote of no-confidence if Mr. Johnson
pushes for a no-deal Brexit. Other Conservative MPs have also suggested as
much, and more are likely to follow. Few members of the opposition Labour
Party could be expected to support a no-deal Brexit either, and the party
leadership is now committed to a new referendum.
In short, the prime minister is changing, but the composition of the House of
Commons and its speaker, John Bercow, are not. The majority of British MPs have, and continue to, express their opposition to leaving the EU without a
deal. Moreover, the speaker of the Commons has a shown a willingness to
be flexible with parliamentary procedure in order to let MPs have their say on
this topic. Thus, notwithstanding Mr. Johnson’s claimed desire to leave the
EU on the 31 October “deal or no-deal”, we believe that MPs with the help
of the speaker will prevent him from doing so. Should Mr. Johnson attempt
to pursue a “no deal”, we believe that this would via one route or another,
lead to a general election.
As such, while a no-deal Brexit remains possible over the longer term, our
view is that the most likely path in the short term is for a further extension
to the UK’s 31 October exit day, either due to a change in stance from PM
Johnson, or in the case of a general election.
What does this means for investors?
As mentioned above, we do not believe investors should take strong positions
based on forecasts of the final outcome of Brexit. But the current market
pricing, which exaggerates the chances of a no-deal Brexit in the short term,
creates an opportunity. At USD 1.24 the pound is now significantly below our
fair value estimate of 1.59. Much of this is due to uncertainty surrounding
Brexit. But notwithstanding the recent softening in economic data, the UK
economy has been holding up and inflation is at the Bank of England’s target.
Assuming the market adjusts to what we believe is a more realistic scenario
for delay over the short term, we expect sterling to rally. As a result, we
overweight the British pound versus the US dollar. For the longer term, we
believe sterling would fall to USD 1.15 in the event of a no-deal Brexit, trend
higher towards USD 1.35 in 12 months in the event of a continued delay,
and rise toward USD 1.45 in the event that proceedings start to point to the
UK remaining in the EU.
For stocks, we believe the long-term political uncertainty created by Brexit
makes the UK relatively unattractive. We overweight EM dollar-denominated
sovereign debt versus UK equities. UK stocks look increasingly attractively
valued, with a 4.8% dividend yield. But while the UK was formerly seen as a
conservative, lower risk market, prolonged Brexit uncertainties could lead to
rising risk premiums. Returns in local currency terms could also be limited if
the pound rallies. Emerging market US dollar-denominated sovereign bonds
have a more favorable longer-term risk-return outlook, in our view, with spreads of around 335bps over US Treasuries.
