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Quick thing before we get started this morning: I’m speaking on a panel at the London Investor Show’s 10th anniversary event next Friday (25 October). If you fancy coming along – and I always like to see readers – then you can get £50 off your ticket by using the code “MONEYWEEK19”. Sign up here!
We have a Brexit deal. The EU is happy with it. Most of the Conservative party appears to be happy with it.
Now it just needs to get past Parliament. Tomorrow.
Aye, there’s the rub.
We have a deal – what happens now?
Let me be upfront and tell you – as if you hadn’t guessed – that I am not an expert in parliamentary procedure.
No one else will tell you this, but early on in your career as a journalist, you get to choose whether to have a basic grasp of negative bond yields or to understand exactly what Black Rod does. But you can’t have both.
However, that said, it’s pretty clear to me that Parliament and the courts have all sorts of ways to spring surprises, even on the experts. So my approach to this is to assume that anything can happen on the admin front in the next fortnight or so.
That doesn’t really matter. Because you are not taking short-term bets on the direction of the pound or the FTSE 100 (if you are, I wish you luck, but I can’t help you). You are investing for the long run. You are buying what’s cheap, and you are doing so in the most cost-effective manner that you can find.
So let’s have a look at where we are now, and what it suggests for the end game.
Boris Johnson and the European Union have agreed a deal. It’s now up to Parliament whether to pass it or not. That’s what happens on Saturday.
If it passes, well, that’s it. We leave on 31 October. Yes, that’s just the start of the talks in many ways, but you don’t get the “no deal” disruption everyone was fretting about.
The pound continues to bounce (helped by the fact that the Bank of England has made noises about eventual interest-rate rises if there is a deal). And asset managers worldwide take Britain off the “do not touch” list. And maybe a few more decisions that investors and businesses have been sitting on get the go-ahead.
In all, with Britain looking cheap, any deal that doesn’t involve headlines about traffic jams stretching from Dover to Yorkshire will very probably be a big boost for UK assets.
But what happens if it doesn’t pass? Because that’s a pretty big possibility. Indeed, while I think that Johnson has a much better chance of making this happen than I would have given him credit for a few short months ago, the parliamentary arithmetic looks brutal. At best, it’s a coin toss on whether the deal is approved by Parliament.
So then what?
Most roads lead to Boris Johnson’s Brexit
Well, the thing is, we’ve now got a deal that the EU has said that it is happy with, and which – crucially – the Conservative hardliners appear to be happy with.
Why does that matter? Because whatever happens next, we now have an end destination that both the EU and one UK governing party can agree on.
So let’s say Parliament knocks it back. Let’s say all the legal shenanigans then come to nothing, and there’s no extension, and we leave with a – gasp – “no deal” on 31 October.
Presumably on the morning of 1 November, we say: “OK we’ve left the EU. Oh, remember that deal we struck a fortnight ago? Let’s implement that, and then get on with the rest of the talks.” A “managed no deal”, as Helen Thomas of Blonde Money puts it.
And what if there is some sort of extension? Jean-Claude Juncker had ruled this out but that’s not in his power to enforce, so it probably wouldn’t happen. In other words, if Britain was to ask for an extension, it would get it. Angela Merkel has confirmed this this morning, but you’d have to be deliberately obtuse not to have already understood this.
I mean, this is tricky. My gut feeling is that the government would do everything it could to avoid asking for an extension and thus end up with the default of leaving on 31 October.
But as I said, I’m no constitutional expert, so maybe there are ways to finagle an extension.
Yet if that happens, there surely has to be an election. And if you get an election, then it’s very easy now for Johnson to frame it as “the people versus Parliament”. Given that, the parliamentary arithmetic could easily shift in favour of getting the deal we’ve just agreed through the Commons, and then we leave.
What if there’s no election? Well, I guess we could all limp on until 31 January. But by that point, it’ll be pretty clear that there is no deal that will get past Parliament. So the need for an election or an end to the extensions just becomes more acute.
So, in all, I think that sooner or later, this is the deal we’ll get.
In the near term, that means that the “no deal” spectre that has been hanging over markets looks as though it is mostly now a very low probability outcome.
Now, I’ve been saying that you should buy the UK anyway – even when I felt that “no deal” was quite a strong likelihood. So I’m not saying “invest in the UK” because I think that we’re going to get Johnson’s deal. Maybe we still won’t! Anything could happen.
But whatever happens in the short run, we now have a pathway to a pretty amicable relationship with the EU, and – going out on a bit of a limb – we probably now have a lower probability of a Jeremy Corbyn-led Labour government.
So I feel comfortable continuing to suggest that you should be looking at the UK as a destination for your investment pennies.
And if you’re not already a subscriber to MoneyWeek magazine, sign up now – you’ll get a free catch up report with all of our most recent Brexit coverage (including some of the sectors and investments we like), and you’ll get your first 12 issues for £12. Don’t miss it.