On Tuesday, 118 members of British Prime Minister Teresa May’s Conservative Party broke ranks and voted against her proposed deal for the UK to leave the European Union. The deal was defeated 432 to 202, showcasing the profound dissatisfaction that UK lawmakers feel for the deal as it stands — a deal that European Council President Donald Tusk says is the only deal that will be on offer.
The UK opposition leader, Jeremy Corbyn of the Labour Party, immediately called for a no-confidence vote. The government survived that vote handily on Wednesday. Even though the Conservative Party and its allies dislike the deal that May negotiated, they believe that a Labour government under Jeremy Corbyn would be a disaster. (In our view, they are correct, since Mr Corbyn espouses the kind of economic policies that helped drive the UK economy into the ground in the 1970s.)
What is likely to come next in the Brexit saga?
Prime Minister May must now immediately restart negotiations with those within and outside her own party to try to discover what changes to the deal would render it more palatable — and deliver this as a motion to Parliament by Monday. Then she will have to take those proposed changes to Brussels, where she will get a very chilly reception. (Some Conservative politicians have suggested that in spite of their public skepticism, the Europeans will actually be more likely to accommodate now that the first vote has been lost.)
The ultimate outcome is likely to be:
• An extension of Article 50 (the clause in the European treaty governing departures from the Union), and continued negotiations. The Europeans have signaled that this will be possible if requested by the UK.
• A second referendum in the UK, potentially overturning the decision to leave.
• Or a “no deal” Brexit with the UK leaving on baseline World Trade Organization terms for trade, travel, and immigration.
Investment implications: Further uncertainty surrounding Brexit will not be constructive for UK or European equities in the near term. In the longer term, we are bullish on the British pound and on UK equities if the UK leaves the European Union on favorable terms. We are not bullish in the event that the UK departs the Union with a bad deal retaining a large measure of European control, or in the event that Brexit is rescinded by a second referendum.
