A Small Step Toward Brexit Clarity

Late in the day Tuesday London time, news broke that the EU and UK had reached a draft Brexit withdrawal agreement. After weeks of rumors a deal was close, it appears negotiators reached a final text that has UK Prime Minister Theresa May’s backing. EU officials confirmed negotiators agreed on text, but they are refraining from calling it a “deal”—they are awaiting the UK cabinet’s reaction, apparently. Which is uncertain, and so are the terms included. All in all, though, while much is unknowable at this point, we see the potential deal as a small step toward the UK getting on with Brexit—a plus for stocks in Britain and Europe alike.

At this juncture, to call details about what this potential agreement contains “sparse” is a huge understatement. Across the four major UK publications and two US outlets we reviewed, we found nothing but speculation. The most detailed information we saw was from The Guardian, which noted “The principal document … runs to more than 400 pages of dense legal text.” Sounds gripping!

Media is broadly reporting senior members of May’s cabinet are reviewing the deal now, with an eye toward a full cabinet vote on the contents tomorrow (Wednesday) afternoon. From there, assuming May’s cabinet approves (which is not a sure thing, given disparate views on Brexit and many of the associated issues like the Irish border), a special EU “Brexit” summit would take place, with officials targeting late November. Assuming all that happens, the UK Parliament could vote on the deal before Christmas.

While most analysts seem to stress over details of the UK/EU post-Brexit relationship, in our view, British and European markets would benefit from just knowing what the terms are. We suspect markets have been pricing in a bad Brexit outcome for months now, given the high publicity of the back-and-forth talks. Businesses on both sides of the Channel have planned for many different flavors of Brexit. Now they seem to be in a holding pattern. Hence, UK business investment has declined in each of 2018’s three completed quarters—falling -1.2% q/q in Q3, the sharpest drop all year.^[i] Similarly, many European businesses trade heavily in the UK. Understanding what terms may apply—and how to invest to position themselves accordingly—is key.

This isn’t to say the details don’t matter. They do! But mostly because those details will be key to whether May can get her cabinet—and Parliament—to accept the deal. Overall, though, this is a small step toward Brexit clarity. And a minor plus, in our view, as a result.