Brexit – Draft Deal Update

A draft deal has been agreed between the negotiators and the UK Cabinet on Brexit. This is not a trade deal – that will be negotiated during the 21 months long transition period after the Brexit date on 29th March 2019. The current agreement details how Britain will separate from the EU, how much money will be paid to the EU, what will happen during the transition period, commitments on the rights of EU citizens in the UK and UK citizens living in the EU and other issues. This 585 page document still has to be officially approved by the EU and the UK parliament.

Key topics discussed in the draft deal document:

1. Irish border issue
– There’s been an agreement that hard border between Northern Ireland and the Republic of Ireland should be avoided and specific arrangements have to be finalised; additionally, a “backstop” has been put in place, committing to no hard border whatever the outcome of future trade talks between the UK and the EU
– The controversial part is that the backstop would involve a temporary single custom territory, effectively keeping the whole of the UK in the EU customs union (and Brexiteers are not fond of the prospect of being tied to the EU customs rules)
– PM May highlighted that she wants to ensure this backstop does not have to be used and an alternative arrangement will be agreed

2. Transition period
– If the agreement is approved by both parties, a 21-month transition period will kick in
– In this period, the UK will be out of the EU, it will have no voting rights but will continue to abide by the majority of its rules; it’s also the time when a trade deal and the Irish border issue solution should be finalised
– The draft withdrawal agreement states that the transition period may be extended once only by mutual consent

3. Divorce bill for the UK
– The draft withdrawal agreement includes a financial settlement from the UK – this is expected to be about £39bn

4. Citizens rights after Brexit
– The agreement includes a long section on citizens’ rights after Brexit for EU citizens in the UK and Brits elsewhere in Europe
– It maintains their existing residency rights, but big questions remain about a number of issues, including the rights of UK citizens to work across borders elsewhere in the EU

Financial market implications
There is a fair chance this deal will be voted down by the UK Parliament in a few weeks’ time. This is likely to cause further political turmoil; especially if Theresa May is forced to resign or a new general election is planned. Weak pound tends to be beneficial for the largely internationally exposure FTSE 100 but despite that, the market may see a period of sentiment driven volatility. We therefore continue to be cautious on the UK market (no change in view) and our exposure predominantly involves event driven ideas, which are less correlated to the overall market.

Petra Posnikova, an Investment Director at VAR Capital said: “Overall, this year, we have been cautious on our equity exposure and more short duration in our bond exposure, with a healthy level of cash. More recently, we have been taking profits in our equity portfolio to further reduce our exposure to the equity markets.”