The UK stock market isincreasingly telling us Brexit is dead…. This possibility in the almost unfathomable Brexit crisis has become totally feasible.
When the Brexit vote occurred I wrote here, that Brexit would be killed, an opinion that most people considered with utter disbelief. The calculation was simple UK Parliament overwhelmingly, about 3 to 1, against Brexit. Most don’t say it out loud now because it will get them thrown out of Parliament at the next election, but that is their real position.
That it has taken so long to get Brexit to the cliff edge, to topple it over into the abyss, is an utter scandal. The unnecessary damage done to the UK by the gutless in this process is a scandal. It underlines a huge weakness in the British political system and the damage wrought and still be be inflicted will take a long time to repair whatever the outcome.
To get a Brexit now, will take a constitutional crisis where the current government does something so wild that it will boggle the system. This could happen but this now seems increasingly a long shot. If the British Prime Minister, Boris Johnson, does not have a fail-safe way to force exit on 29th October, Brexit will not happen, without an act of god, ever. France could reject an extension or an extension of an extension, the next election could see Nigel Farage as PM, but these are all unlikely turn-ups.
So the position is binary, Dead-Brexit or Hard Brexit at the end of October. The stock market seems to be now indicating Dead-Brexit.
I would like readers to know have no axe to grind either way but I do find the desolation of the whole farce saddening. Personally, whatever happens is fine with me. Brexit will be great for me and a killed Brexit will be great for me too. The opposite seems true for the many, on both sides, who voted against their own best interests, a bizarre and growing new trend in democracy.
So lets forget the politics, if that was possible, what tack should investors take?
They should be long, possibly very long.
A hard Brexit will call down dramatic government actions to prop up the country against the shock it will create to the system. This will roll straight into shares and soften the blow for to the stock market. The pound will take a fall. This will leave shares on the London stock market of many international businesses at incredibly low prices relative to international norms. Their ludicrously high dividends alone will further cushion the fall and in essence, they will also copiously fund the acquirer of any takeover of these businesses.
There is a takeover boom about to break out in the UK and a Hard Brexit will simply make the value of the blue chips in the UK with international business exposure even more achingly cheap. Add to this the market as a whole is already a huge international underperformer because of Brexit fears, much of the Hard Brexit downside possibility is already factored in. This is why the market is rallying on the prospect of a Dead-Brexit.
So the market is buffered on the downside and levered on the upside. A Dead-Brexit is sure to rally the market. That will be at least a 10% rally, likely more.. Does anyone believe killing Brexit will do anything but shot the FTSE vertical? I doubt it.
Now couple this with the end of carry trade killing US QT and a sprinkle of loosening to soften the global economic downturn which is on the horizon. This loosening will mean lower interest rates and its carry trade pumping liquidity. Combined this could create a tremendous ride up for the FTSE to Christmas and beyond.
Now its just down to the politicians to mess it all up. So all eyes have to be on yet another of the political flying circuses that seem to be increasingly plaguing the world.