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UK markets must soldier on through chaos after EU vote

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By Lewis McLellan, Sam Kerr
28 May 2019

UK capital markets issuers and investors who want to do deals need to prepare to ignore Brexit and come to market. There is no sense in waiting for political calm — the European election result shows it simply is not going to come.

Some of London’s investment banks have already taken this approach and remain active — perhaps they are not as busy as they would have been without the threat of Brexit hanging over the UK, but business is getting done.

In equity capital markets there are three London listings being marketed to investors, including two from domestic UK issuers — the IPOs of Trainline and Watches of Switzerland.

Last week, Marks & Spencer launched its £601m rights issue to fund an ambitious joint venture with Ocado.

Banks and investors speaking to GlobalCapital have not forgotten Brexit and neither are they blasé about the damage that a chaotic EU departure could have on the UK economy. Nevertheless, they have to ignore it for the moment.

One banker said that markets were simply soldiering on as best they could through the uncertainty and they should continue to do so in the tumultuous weeks ahead.

Last Friday, UK prime minister Theresa May laid out her plans to resign as leader of the Conservative Party; this increases the chance that the UK will leave the EU without a deal in October.

The weekend’s European elections have muddied the waters further.

Many have hailed the newly formed Brexit Party’s strong result as an indicator of growing support for a no-deal Brexit, but the truth is more complicated — and astute party strategists will surely be well aware of the nuances.

Labour and the Conservatives haemorrhaged voters to explicitly pro-remain and hard-Brexit rivals. But while Nigel Farage’s Brexit Party received the largest share of the votes, pro-remain parties — namely the Liberal Democrats, the Green Party, Change UK, the Scottish Nationalist Party and Plaid Cymru — achieved a larger share of the vote than the Brexit Party and UKIP.

Conservative and Labour voters are a mix of those who want the UK to stay in the EU and those who want it to leave, but analysis by pollster Lord Ashcroft indicates that a slight majority would prefer to stay in the bloc.

However, there is a sense that voters are becoming more polarised between those who want Brexit at any cost and those who want a second referendum on EU membership.

No calm in this storm

There are fears that the next Conservative leader will back Nigel Farage’s approach and not ask the European Union for a further extension to Article 50, meaning that the UK might automatically leave the bloc without a deal on October 31.

However, any leader that did so would be acting against the expressed will of the House of Commons, which is overwhelmingly against a no-deal exit.

Moderate Conservative MPs warned against this approach over the weekend and indicated that they would vote against the government in a confidence vote.

Jeremy Hunt, the foreign secretary and Tory leadership candidate, expressed his concern over this eventuality in an interview with the Conservative-leaning Daily Telegraph on Monday, and warned it would be political suicide for the Conservative Party, as it would probably lead to a general election.

It is likely that neither the Conservatives nor the Labour opposition want a general election, given their performance at the European polls — should a UK election produce a similar result, both would lose huge numbers of seats.

There are two routes to avoiding a no-deal exit without an election. First, the government could produce a Brexit deal with the EU that meets parliament’s approval.

But it has not managed this to date, leaving the option of a second referendum on membership of the EU — an option with plenty of opponents in both the major parties.

In short, the UK has no firm direction on what is to happen at the end of October. The country appears reached a political impasse with opposing factions increasingly entrenched.

Some investors have already abandoned the UK, and investment outflows from the country remain heightened, despite improving underlying economic fundamentals, according to research from Bank of America. Only Italy is more unpopular than the UK with European fund managers.

Among global fund managers surveyed by BofA, the UK is the least popular region in the world, with 28% underweight.

Brexit will stop a lot of capital markets activity, but some transactions need to be done. For those issuers, there is no sense in waiting for things to get better, as many did in early 2019. The situation will not improve any time soon, and issuers, banks and investors need to put their heads down and get used to doing deals amid the chaos.

By Lewis McLellan, Sam Kerr
28 May 2019