Brexit forecasts range from soft to ‘no deal’ following UK election

The bulk of investors believe Theresa May’s bruising at the ballot box could soften Brexit, although others question whether her aggressive rhetoric against the EU in the lead up to vote was just politics.

European Council president Donald Tusk has responded to the UK’s hung parliament by stating that he is uncertain when Brexit negotiations will begin, but warning that the EU and UK need to avoid “no deal” due to “no negotiations”.

Brexit negotiations were set to begin in 10 days although the EU reportedly indicated in the lead up to the election that it would be appropriate to delay negotiations if Labour won a majority.

A note to clients from Goldman Sachs Asset Management said a “soft Brexit” was now more possible, but that the “path is less certain”.

Prime Minister May pledged a so-called ‘hard Brexit’ that would prioritize immigration control and remove Britain from the single market and customs union,” GSAM said, adding “A coalition may entail compromise and a greater willingness to accept free movement of labour on the condition of retaining access to the EU single market. We believe this scenario would be supportive of growth over the longer term.

However, Darius McDermott, managing director of FundCalibre, believes May’s hard Brexit rhetoric was playing to domestic politics and that with a stronger Conservative majority she would have delivered a more moderate outcome.

“Broadly May was a Remainer, but as Prime Minister was there to carry through Brexit. I think her strategy was to talk about hard Brexit, but I think her lack of transparency around her strategy has also hurt.

“I don’t think there’s any clarity at all today around a soft Brexit, other than it’s still there and it’s still confusing.”

Pioneer Investments’ head of global asset allocation research Monica Defend says the outcome now is likely no deal or the acceptance of an EU-driven agreement, with the third option of hard Brexit looking increasingly unlikely.

“What is likely, at this stage, is that the Tories will seek a convergence on the main Brexit guidelines included in their political manifesto, which included a confirmation that the Government is willing to make a reasonable contribution to the European Union after Brexit, albeit with a warning that vast annual contributions to the European Union will end, an exit from the Single Market and a common willingness to secure rights for EU citizens in the UK and vice-versa.

“However, this won’t be an easy task.”

Geir Lode, head of global equities at Hermes Investment Management, says the UK election seemed a distraction ahead of bigger challenges facing the country, such as rising inflation, stagnating productivity and Brexit.

“This unexpected result increases the likelihood of “no deal” on Brexit, and even if that scenario is avoided it is still almost impossible to predict the final shape of any agreement. Clearly this result will be challenging for sterling in the short-term.”