No Deal Brexit Won't Happen, says Queen's Bank

Britain faces four "impossible" Brexit scenarios, says Coutts Bank, but of the four, the most likely outcome is Parliament votes through a modified version of Prime Minister Theresa May’s deal.

A no-deal Brexit is the least likely scenario, according to private bank Coutts – and UK equities will present a buying opportunity once the uncertainty clears.

Lord Waldegrave, chairman of Coutts and a life peer in the House of Lords, told clients on a call earlier this year that the probability of a no-deal Brexit was highly unlikely, and holds firm on that view.

Coutts’ investment team agrees with his assumptions. “There’s a clear majority in Parliament to avoid no-deal,” says head of multi-asset investments Alan Higgins. “It could happen, of course it could, but it’s a pretty low probability – circa 5-10%.”

In fact, it is probable a no-deal Brexit will be ruled out entirely by Parliament soon, and in reaction to this development sterling rallied on Wednesday to 1.30 against the US dollar – its highest level in 10 weeks.

Impossible But Not Improbable

Instead, Higgins says we face three other “impossible scenarios”. The first of those, which Coutts believes will be the end outcome, is that some version of Theresa May’s deal eventually gets voted through – seemingly impossible due to the rout it received in the first vote last week.

The two other possibilities are: a second referendum, which is gaining traction but still seems an implausibility; or a Norway-style deal.

“Even if we delay Article 50 until June or July, then those four impossible scenarios still exist,” Higgins explains. In fact, adds Monique Wong, multi-asset investment manager at Coutts, an extension of Article 50 is just as unlikely as no-deal.

That’s because the UK would need to ask the European Union for permission to delay Article 50 and the EU will not agree unless an alternative plan is presented.

Buying Opportunity in UK Equities

Wong believes UK equities could be the surprise performer of 2019. “It’s not hugely exotic, but it’s very contrarian because UK equities are unloved, underappreciated and under-owned – and for good reason,” says Wong.

However, the economy – and the currency – will recover once the Brexit fog has lifted, businesses will get back to “business as usual”, and multi-asset portfolio managers may very well return to the market.

And that’s on a large and mid-cap perspective. The FTSE 100 contains many large, profitable multi-nationals that are attractively valued and, overall, yield an attractive 5% for 2019.

The latter point is important, particularly for those looking for income, Higgins notes. “Extending the time horizon, over two years you’re up 10% in the UK just from dividends; three years you’re up 15% – it gives you a big buffer.”

But the real opportunity for Wong will be in domestic stocks. She adds that, as a UK-based investor Coutts is highly exposed to UK equities and currently have a neutral to modest overweight position relative to the portfolios’ history.

“If that shifts after we have some Brexit clarity, we will be even more overweight and that will be to the domestically oriented companies – things like banks, homebuilders and the FTSE 250,” she predicts.

Corbyn Risk Off The Table?

One risk to UK equities that seems to have subsided since last week is the spectre of an imminent Jeremy Corbyn-led Labour Government.

After May’s deal was overwhelmingly voted down, Corbyn tabled a motion of no confidence in the Government, which was defeated. As a result, that option’s been taken off the table.

The next general election, under the Fixed-Term Parliaments Act, is scheduled for May 2022, so over three years away. Higgins’ best prediction of the outcome would be another hung Parliament either way as the country is divided: “What is happening is that Labour is gaining in the South but losing in the North.”