One Step Forward and Two Steps Back?
Last week the FTSE 100 experienced the biggest one day decline in the past three years, as it shed around 5%. This is a clear indication that shows that investors are becoming increasingly unsure about the prospects for the global economy during such a period of heightened uncertainty, which is posing significant risks. A rough couple of weeks for FTSE 100 investors is an understatement. After rising from a low of around 6,650 basis points (bps) at the end of 2018 to a high of 7,450 bps in June of this year, during the past few weeks the index has slumped, falling below 7,100 bps – a level not seen since February, earlier this year.
No article about the volatility and issues facing the FTSE 100 would be complete without mentioning the infamous and trending term, Brexit. When combined with all of the other uncertainties facing the global economy, Brexit is now a big issue not just for policymakers in the UK, but in the rest of the world as well. As we all know by now, the deadline for Brexit has been moved further, to October 31st, leaving Britain and the rest of the world wondering whether or not there would be a deal and would it be a hard or soft Brexit. Last week the EU was presented with Boris Johnson’s proposal, which did not go down well with Boris’ counterparty.
Mr Johnson suggested that, just as he had compromised in the past, it is now the EU’s turn to return the favour and do the same. Despite not having a mutual agreement on the deal presented, reports in the media stated that some political members in Brussels were relieved that his stubbornness did not overshadow a possible consensus in the coming future and were thankful that this was not his final, take-it or leave-it offer. A few even hoped it might be tweaked to include an alignment on customs as well as on regulations, or to revert to a Northern Ireland only backstop. However, the signals from Downing Street suggest that the prime minister sees little scope for more compromise on his side.
Boris’ sales pitch to the EU next week, ahead of the crucial European Council summit on October 17th and 18th rests solely on two major arguments. The first being that only a deal close to what he presented them can ever pass in British Parliament. For evidence, he quotes the Brady amendment, a version of Mrs May’s Brexit deal that replaced the backstop, which MPs voted for in January. The Brady amendment was a Government motion on Brexit progress that was accepted in the beginning of this year by the House of Commons. This entailed the Government to renegotiate the provisions in the withdrawal agreement relating to the Northern Ireland backstop and replace it with alternative methods. The second is that, if the EU is unwilling to accept his plan, he will have no alternative but to leave with no deal on October 31st. And although this may not benefit Britain in any way, it will also negatively affect other countries within the EU, especially Ireland.
The proposed solution is interlocking jurisdictions – with Northern Ireland labelled as a special “zone of regulatory compliance”, aligned with parts of the European market, while also part of a UK will be labelled as a customs regime. The problem of future divergence is kicked down the road. Northern Ireland’s unique status would be routinely reapproved by the Stormont assembly (can be described as Northern Ireland’s legislature body).
It is not clear how any of the above plan will satisfy concerns that Dublin and the rest of the EU have repeatedly raised during the course of the Brexit drama. In a nutshell the concerns raised were about the integrity of the single market and the Good Friday agreement, the agreement done on Good Friday 10th April 1998 which entailed a peace agreement between British and Irish governments and most of the political parties in Northern Ireland on how Northern Ireland should be governed. Mr Johnson’s offer makes explicit intention to effect a significant rupture from EU legal norms. It is evident that his plan requires a new customs border between Northern Ireland and the Republic, but insists that checks can be enforced in ways that are not disruptive, or damaging to the peace process. This has a major dent to his plan as these two countries have been in conflict since the 1960s thus one is left wondering how this will plan out and develop.
Keeping in mind Mr Johnson’s ego, a further extension from October 31st would be a huge humiliation for him. Especially when his aim was to fabricate a no-deal Brexit crisis while in the process trying to force the European Union to shatter and crumble. This would have allowed him to pass Brexit through parliament, while creating a platform for a general election which he believed he would have on by a landslide. To his surprise this went all wrong and at the first possible opportunity, parliament had defeated him by 27 votes. And to top it all, the opposition leader Jeremy Corbyn labelled him as a “no mandate, no morals…” minister.
Despite being in favour of a general election, the prime minister can, in my personal opinion, try to turn things around by having a referendum on a version of a draft deal. This might play into his hand as some MPs might have a change of heart and win them over with their trust and confidence given that Mr Johnson will be indirectly asking for their opinion. If this scenario plays out to his favour he might get the majority votes and find a compromise with the EU and pass Brexit with a soft deal.
In terms of investments, given the current global market situation, one can consider a diversified fund that is globally dispersed and invested in numerous securities and multi-asset investments. However, a cautious investor can opt to invest in capital guaranteed products that can act as an alternative to fixed income securities. That way they will have their mind at rest. Needless to say it is always important to discuss any investments with your financial advisor for guidance.
Matthew Miceli Donnelly, ICIWM, B.Com Banking & Finance & Management (Melit.), B.Com (Hons.) Management, MBA (Melit.), is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]