Brexit: The Movers & Shakers

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Brexit Movers Shakers

With investors pre-occupied by the implications of Donald Trump’s victory in the US presidential election, Brexit slipped from the headlines in November. However, as the Supreme Court deliberates this week on Westminster involvement in the triggering of Article 50, it has returned sharply to the fore. Regardless of the Court’s ultimate decision, 2017 is set to witness Brexit’s second act as negotiations on the terms of the UK’s exit get underway for real. In the second of our “Movers and Shakers” series, Investment Manager Robin Kyle looks at the key parties[1] involved in the discussions to consider their influence on the eventual outcome.

For those in search of a good pantomime this December, the forthcoming Article 50 negotiations offer all the fundamental ingredients. Theresa May and Brexit Secretary David Davis will attempt to agree an exit that is neither “too hard” nor “too soft” but “just right.” Meanwhile (at least if the British media are to be believed), the villainous President Juncker will do all that he can to ensure that the process serves as a deterrent for other countries plotting their own departure from the Union. Against this backdrop, are the Brexit “Movers and Shakers” likely to come to a pragmatic conclusion or should investors anticipate a protracted battle?

Secretary of State for Exiting the European Union: David Davis

Theresa May has confirmed that “Brexit means Brexit” and David Davis is the man tasked with delivering it. Much like the issue over which he presides, Mr. Davis has divided opinion since his appointment. However, his agreement this week to a Labour motion for the government to set out its strategic plans prior to negotiations has helped to alleviate tensions on the home front.

In terms of priorities, Davis has highlighted that the UK’s primary objective remains securing the best access to goods and services in the European market. He has also set out that immigration controls will not be imposed in a way contrary to national or economic interests. From an investor’s point of view, Davis appears to have his priorities in the right order. His latest rhetoric pointing towards a desire for a “softer” Brexit, a result that would please the markets.

European Commission President: Jean-Claude Juncker

Of course, there’ll be no “soft Brexit” if Jean-Claude Juncker has anything to say about it. The President of the European Commission hasn’t forgotten David Cameron’s attempts to block his appointment and has taken a hardline stance. In charge of negotiations, his primary objective is to ensure the ongoing survival of the Union and there are fears that he may use the UK as a precedent to deter other member states from a similar course of action. However, his anti-British rhetoric has already incurred the ire of Angela Merkel who has taken the opportunity to meet with French and Italian leaders on the subject of Article 50 without including him. Although likely to be the UK’s toughest opponent, his bark may prove worse than his bite as European leaders get down to the practicalities of protecting trade relationships.

EU Chief Brexit Negotiator: Michel Barnier

A further challenge to the UK comes in the form of the EU’s Chief Brexit Negotiator, Michel Barnier. Barnier has stated that the single market’s four freedoms are indivisible and that the UK will not be allowed to disregard freedom of movement while retaining access to other perks. Despite having built a reputation on his tenacity, Barnier has also won respect as a tough but fair negotiator. Whilst unlikely to offer Britain an easy ride, he is at least sensitive to the markets, noting that Europe has a common interest in not prolonging the state of uncertainty. At the heart of the Eurozone Crisis, Mr. Barnier had a policy of refusing interviews, lest his comments should move markets.

German Chancellor: Angela Merkel

As the leader of the EU’s most populous and economically powerful country, it is clear that Chancellor Merkel will be a key figure in the negotiations – despite Theresa May’s assertions to the contrary.  Politically astute – and with her own re-election to consider next year – Merkel has publicly echoed Barnier in stating that Britain will not be allowed to “cherry pick” those parts of the union that it adheres to, particularly with reference to freedom of movement. Equally, she’s hinted that it may be prudent to consider when such freedoms should kick in, potentially opening up the possibility of allowing the UK a period of grace. Germany has vested interests in preserving one of its largest export markets, with the UK the largest global exporter of German cars. Having conceded that there is no need to be “nasty” to the UK, like Davis, it appears that Merkel is likely to be pragmatic when negotiations get underway next March.

Cat among the pigeons: Nigel Farage

It has been quite the year for the former UKIP leader, corroborated by his inclusion on Time Magazine’s shortlist for Person of the Year. Following an incendiary speech to the European Parliament in the aftermath of the result, there are fears that Mr. Farage may use his newfound political platform to further antagonise the EU. With President Juncker’s comments suggesting that emotional as well as economic factors will inform negotiations, investors will be hoping that Mr. Farage does not become an unnecessary distraction.

Ultimately, rhetoric and reality can be two different things. While the media at home and abroad will do their utmost to whip up a frenzy, politicians will take a much harder stance for the front pages than they will behind closed doors. One need only look to the reporting and reality of Greek bailout talks last year or, more recently, Donald Trump. Just as the president-elect has tempered many of his campaign promises, we expect that economic reality will overcome political posturing and the two sides will reach a sensible compromise. Protracted and uncertain negotiations are likely to manifest themselves particularly in currency weakness and if the effects are felt in Europe it could add fuel to the populist fire that Juncker is so desperately keen to avoid. In response to the uncertainty, we have recently hedged our euro exposure to sterling, with the UK currency continuing to look undervalued.

[1] With 28 countries sitting around the negotiating table, together with EU representatives, many people will ultimately be involved in shaping the terms of the UK’s agreement. In the interests of brevity, this article focuses upon the small number considered to be most influential or controversial.

By Robin Kyle, Investment Manager

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