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Brexit Negotiations Face Delay After UK Election

19 June 2017PoliticsEconomicsUK
  • Despite losing her majority in the 8 June General Election, Theresa May remains Prime Minister and is building an alliance with Northern Ireland's Democratic Unionist Party (DUP) to pass a Queen's Speech.
  • However, Citi analysts think that Theresa May's position is unsustainable over the medium to long term as she may struggle to maintain her authority on issues ranging from domestic policy to Brexit, and negotiations with the EU and its member states.
  • Citi analysts expect a successful leadership challenge in the coming months. Theresa May could step down and stay as a caretaker or make way for someone else as caretaker. Even under a new leader, such a fragile coalition is unlikely to last long, not least because of difficulties in passing urgent Brexit legislation.
  • New elections within the next 6-12 months is Citi analysts base case, most likely still in 2017 to retain at least some time for Brexit negotiations.
  • Brexit implications: Any further delays to the negotiations due to leadership contests and/or new elections make it even less likely that the EU and the UK can conclude negotiations on the withdrawal agreement, the transition deal and the final trade deal by November 2018. That makes an off-the-shelf transition model like Norway-style membership of the European Economic Area (EEA) more likely in the meantime. However, this is unlikely to be a viable status for the UK indefinitely and Citi analysts still expect the UK to exit the EU's Single Market ("Hard Brexit") eventually.

Asset class implications

  • Pounds (GBP): Citi analysts reiterate that in the near to medium term, the risks to GBP are skewed to the downside.
  • UK equities: A weaker GBP is likely to provide support for UK equities, especially those with international exposure. Citi analysts are neutrally UK large-cap equities and underweight in mid and small cap equities

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