Brexit state of play post-Salzburg

By: Matthew Elliott, Senior Political Adviser
 

The informal meeting of the European Council in Salzburg this week marked an important point in the Brexit negotiations: it was the moment the rubber hit the road. The last formal European Council meeting was at the end of June, so this was the first time the Chequers plan (which was announced at the beginning of July) was discussed by the leaders of the other 27 EU member states.

The informal Council meeting in Salzburg was primarily convened to discuss the EU migration crisis and Theresa May was only given a short slot at Wednesday’s dinner to explain how the UK’s negotiating position had ‘evolved’ since they last met. Chequers optimists highlight the growing split between France and Germany on the one hand, and Denmark, the Netherlands and Sweden on the other. Chequers pessimists point to Donald Tusk’s tough stance at the final press conference. So whilst the Prime Minister’s plan did not implode on impact, it certainly did not receive the soft, pre-Party Conference landing which we had been briefed to expect in advance. Government insiders were certainly surprised by the bump.

So how did we get to this position over the summer? What should we expect for the rest of the year? And what are the chances of the EU (a) agreeing a deal and (b) it being approved by Friday 29th March 2019. The next six months are certain to come closer to 2016 levels of drama than the epic year that was 2006.  

 

Progress on Brexit over the summer

Parliament might have taken a six-week break over the summer (and is now back in recess after its traditional two-week September sitting), but this did not put a damper on Brexit manoeuvrings. Jacob Rees-Mogg’s European Research Group was active with its #ChuckChequers campaign, which was reinforced by the resignation of several Ministers and aides in the immediate aftermath of Chequers. Steve Baker has galvanised the backbench Eurosceptics with his top-notch organisational skills but the apparent lack of coordination between Boris Johnson, David Davis and the ERG has somewhat blunted what might have been a concerted fightback by Eurosceptics.

More coordinated was the opposition to Chequers from former Remain supporters on the government backbenches – from those who have been accepting of the referendum result and the need to deliver on the public vote of June 2016, like Nick Boles, all the way through to those who have struggled to reconcile themselves to accepting Brexit, like Putney MP Justine Greening. The #NorwayThenCanada plan garnered significant media coverage, particularly in the op-ed columns, but its traction in Westminster underlined the fact that the Prime Minister’s position is bolstered by facing a divided opposition. 

Also busy, but travelling under the radar, was Dominic Raab, who spent the summer collecting Eurostar Frequent Traveller points. The new Brexit Secretary has already had more facetime with the EU’s Chief Negotiator, Michel Barnier, than David Davis had in his entire two years at DExEU. The pair announced after their meeting on 21st August that the talks would henceforth be “continuous” rather than in regular rounds, as had been the case until that point. Whilst it is unfair to accuse Davis of being workshy, Raab has certainly thrown himself into the position, and his hard work has not gone unnoticed amongst colleagues discussing the next leadership election.

Both sides in the negotiation have been underlining for some time now that a deal is 80% done, and in recent weeks the figures “90%” and “95%” have cropped up in off-the-record briefings. But clearly there remain sticking points, of which issues relating to the Irish border remain the most prominent – an issue we have highlighted previously.

This was the issue which the European Research Group published a paper on earlier this month, proposing the use of technology as an answer to the Irish backstop question. They saw their proposed solution as a ‘get out’ for the Prime Minister to abandon Chequers and to move back to a Lancaster House approach to the negotiations, or a ‘Canada ++++’ deal, as David Davis often described it.

The use of technology has also been proposed in recent days by the European Union, but for a rather different border – the Irish Sea as opposed to the land border. This will remain the key issue which all sides dance around, but the recognition that technology provides the solution for frictionless trade could prove to be an important breakthrough for the final stage of the negotiation.

 

Key milestones for the next few months

With Salzburg over, when the Conservative Party Conference is out the way (first week of October) the next milestone will be the formal European Council in Brussels on Thursday 18th October. This meeting was the original self-imposed deadline for agreeing the legally binding treaty setting out the terms of the UK’s withdrawal agreement and the 21-month transition period. But a special meeting has been agreed this week for November (rumoured to be pencilled in for Tuesday 13th) to sign off on the final deal. This would leave December free for the ‘meaningful vote’ in Parliament; January and February available for the European Parliament to sign off on the deal; and all parties signing on the dotted line at the European Council meeting on the 21st and 22nd March, allowing Brexit to occur on the 29th March. 

There is not much wriggle room in this timetable, but there is another formal European Council meeting scheduled for the 13th and 14th December, and Parliament doesn’t rise for Christmas recess until Thursday 20th December. The prospect of missing some of their Christmas holiday would certainly focus the minds of wavering Parliamentarians.

Some people (including Chancellor Philip Hammond) have mooted extending the Article 50 process, but this would raise difficulties from an EU perspective. The next round of European Elections will take place at the end of May 2019, so extending the Article 50 process would raise all sorts of difficult questions about whether they should take place in the UK. This is an important reason why all sides have an incentive to conclude a deal before Christmas, so don’t expect slippage.

 

Deal or no deal?

95% of the deal might already have been agreed, but one contact at DExEU still puts the chance of a deal at 50:50 (and that’s before it hits either the UK or EU Parliaments). The mood in No.10 before Salzburg was more optimistic, and even David Davis spoke earlier this week about how there could be a “reset” in the negotiations as the European Council takes over the reins in the negotiations from the European Commission.

The public mood is a mixture of frustration, irritation with the grandstanders and – increasingly – disengagement, so it will be interesting to see whether Theresa May responds to this week’s unexpected reprimand by EU leaders by cowering or by calling their bluff. I expect the Prime Minister to explain in her low-key but forceful way that the EU’s intransigence over the border issue would cause chaos to the Irish economy, with the rest of the EU having to pick up the bill.

When it comes to the meaningful vote in December, the key imponderable is what the Labour Party will do. Jeremy Corbyn’s silence on Brexit is notable and it is sometimes difficult to work out whether he is being menacingly unpredictable, very canny or desperately hoping no one seriously asks him to spell out his position.

Sir Keir Starmer’s ‘six tests’ seem designed to allow Labour MPs to vote against the deal whatever it contains. But there is always an outside possibility that rather than whipping the Party to vote against the deal, Jeremy Corbyn might allow a free vote or – more likely – MPs might choose to do whatever takes their fancy. It’s worth recalling the vote in June this year, on staying in the Single Market (Lords’ amendment 51), when Labour MPs were whipped to abstain: 75 voted for the amendment and 15 voted with the Government, allowing it to be voted down. Labour’s discipline at the moment isn’t exactly iron-clad. 

There are so many ‘unknown unknowns’ that making predictions on this is a mug’s game. But my current instinct is that the EU’s reaction this week was no more than grandstanding: Theresa May will get a deal not dissimilar to Chequers, it will be approved in Parliament, and Britain will leave the European Union at the end of March next year. We will not have fully taken back control, but we will have a deal that most Leavers would have leapt on before 2016, and which most Remainers can live with. 

 

Download: Brexit state of play post-Salzburg

 
CONFLICTS
 
^ Independent Research:
This is independent research. The analyst who has prepared this research is not aware of Shore Capital Stockbrokers Limited and/or another member of the Shore Capital group (“Shore Capital”) having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.
+ Non-Independent Marketing Communication:
This is a non-independent marketing communication. The analyst who has prepared this report is aware that Shore Capital Stockbrokers Limited and/or another member of Shore Capital has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research. Accordingly the report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
 
REGULATORY DISCLOSURES
It is the policy of Shore Capital Stockbrokers Limited not to make recommendations on companies for which it acts in an advisory capacity. Where this is the case, research reports refer to “House Stock”. The reference to “Price” on the front cover of formal research reports is to the current price as at the date of the research report. The date and time when the production of the report is completed is the date and time stated on the relevant report.
 
Stock Recommendation Definitions:
Buy 10%+ absolute performance within 3-months or otherwise as specified. Hold +/- 10% absolute performance on a 3-month basis or otherwise as specified. Sell -10% absolute performance on a 3-month basis or otherwise as specified.
 
Valuation, Methodology and Assumptions:
For a summary of the basis of valuation, methodology and/or underlying assumptions used to evaluate the company covered in this research report, please click on the following link https://www.shorecapmarkets.co.uk/media/f021896536.pdf or contact your usual analyst or sales person at Shore Capital. For information on changes in valuation, methodology or underlying assumptions related to this research report (if any) please contact your usual analyst or sales person at Shore Capital.
 
Proprietary Models:
Shore Capital analysts typically utilise proprietary models to produce research reports. Information on the specific proprietary models used for the company or companies covered in this research report is available by contacting your usual analyst or sales person at Shore Capital.
 
Research Distribution:
In the period 2nd April 2018 to 29th June 2018, Shore Capital Stockbrokers covered 169 “non-house” stocks. There is a Buy recommendation on 89 (53%) stocks, a Hold recommendation on 58 (34%) stocks, a Sell recommendation on 21 (12%) stocks. Shore Capital Stockbrokers covers 218 stocks (non-house and house). The breakdown above only applies to ‘non-house’ stocks.
 
Lead Analyst:
The lead analyst with respect to each research item is the first and most prominent name. Please note that more than one analyst may work on a specific research item.
 
Conflicts of Interest:
Shore Capital maintains a Conflicts Policy which explains how conflicts are managed. A summary of the Conflicts Policy is available at www.shorecap.co.uk. For details of potentially relevant conflicts of interest (if any) on a specific stock whether disclosed in this research report or not, please click on the following link http://shorecap-disclosures.co.uk or contact Shore Capital’s compliance department on 020 7408 4050. It should be assumed for the purpose of this report that Shore Capital may, primarily as a result of its market making activities, have a position or holding in any of the securities covered in this report.
 
Recommendation History:
For a list of all research recommendations of Shore Capital analysts and sales persons disseminated in the previous 12 months, please click on the following link http://shorecap-disclosures.co.uk/recommendations/recommendations.pdf. For a list of the change(s) and the date(s) of previous research recommendations during the preceding 12 months, please click on the following link: http://shorecap-disclosures.co.uk/changes/changes.pdf
 
Planned Frequency of Updates:
Recommendations in Shore Capital research reports are kept under constant review. As such, there is no formal timetable for the review of such recommendations.

DISCLAIMER
 
The issue of this report is not necessarily indicative of long term coverage of the stock. Hence, updates may or may not be issued in the future. This report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities, or related financial instruments. It does not constitute a personal recommendation as defined by the Financial Conduct Authority (“FCA”) or take into account the particular investment objectives, financial situations or needs of individual investors. The recipient of this information must make their own independent decisions regarding any securities, or financial instruments mentioned in this report.
 
The information above is obtained from sources considered reliable. However, the accuracy thereof cannot be guaranteed by us. Shore Capital or any of its associated companies (or its or their employees) may from time to time hold positions in the above equities as principal, and may also perform corporate advisory services for these companies. Share prices can go down as well as up and past performance is not necessarily a guide to the future. Some investments may require you to pay more money than the cost of the investment. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes in exchange rates. Levels and bases of taxation may change.
 
This document may not be reproduced or further distributed to any person (including the media) or published in whole or in part, for any purpose. The material in this document is not intended for distribution or use outside the European Economic Area or Switzerland (with the exception of the United States) and may not be published, distributed or transmitted to persons in Japan, Canada or Australia. This material is not directed at you if Shore Capital is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you.
 
In the United Kingdom this document is being distributed only to, and is directed only at, persons who are (i) investment professionals falling within article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) (the “Order”) or (ii) high net worth entities falling within articles 49(2)(a) to (d) of the Order or (iii) any other persons to whom it may be lawfully communicated (all such persons being referred to as “relevant persons”). This document is addressed only to, and directed only at, relevant persons and qualified investors within the meaning of the Prospectus Directive (2003/71/EC, as amended) and must not be acted on or relied on (i) in the United Kingdom, by persons who are not both relevant persons and qualified investors or (ii) in any Member State of the EEA other than the United Kingdom, by persons who are not qualified investors. Any investment or investment activity to which this communication relates is available only to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire any securities referred to in this document will be engaged in only with, in the United Kingdom, relevant persons who are also qualified investors, and in any Member State of the EEA other than the United Kingdom, qualified investors.
 
The views expressed in this document accurately reflect the research analyst’s personal views about any and all of the subject securities and the company on the date of this document. Any opinion or estimate expressed in this document is subject to change without notice. Shore Capital may act upon or use the information or a conclusion contained in this document before it is distributed to other persons. None of Shore Capital Stockbrokers Limited or any member of Shore Capital, or any of its or their directors, officers, employees or agents accept any responsibility or liability whatsoever for any loss however arising from any use of this document or its contents or otherwise arising in connection therewith. By accepting this document, you agree to be bound by the foregoing limitations.
 
The following applies if the company is quoted on “AIM” – defined as the AIM Market of the London Stock Exchange. AIM is a market designed primarily for emerging or smaller companies and the rules of this market are less demanding than those of the Official List of the UK Listing Authority, consequently AIM investments may not be suitable for some investors. Liquidity may be lower and hence some investments may be harder to realise.
 
DISTRIBUTION IN THE UNITED STATES
 
This investment research is prepared and distributed in the United States by Shore Capital Stockbrokers Limited (Shore Capital) and, in certain instances, is distributed on behalf of Shore Capital by Enclave Capital LLC (Enclave), a U.S.-registered broker-dealer, only to major U.S. institutional investors, as such term is defined by Rule 15a-6 under the U.S. Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission (SEC). This investment research is not intended for use by any person or entity that is not a major U.S. institutional investor. If you have received a copy of this research and are not a major U.S. institutional investor, you are instructed not to read, rely on or reproduce the contents hereof, and to destroy this research or return it to Shore Capital or to Enclave. Analyst(s) preparing this report are employees of Shore Capital who are resident outside the United States and are not associated persons or employees of any U.S.-registered broker-dealer. Therefore, such analyst(s) are not subject to Rule 2711 of the Financial Industry Regulatory Authority (FINRA) or to Regulation AC adopted by the SEC which, among other things, restrict communications with a subject company, public appearances and personal trading in securities by a research analyst. Any major U.S. institutional investor wishing to effect transactions in any securities referred to herein or options thereon should do so by contacting a representative of Enclave. Enclave is a broker-dealer registered with the SEC and a member of FINRA and the Securities Investor Protection Corporation. Its address is 19 West 44th Street, Suite 1700, New York, NY 10036 and its telephone number is 646-454-8600. Shore Capital is not affiliated with Enclave or any other U.S.-registered broker-dealer.
 

If you would like to amend your communication preferences please contact your Shore Capital representative, or alternatively, should you wish to unsubscribe from all email communications you can do so by emailing [email protected]

Shore Capital Stockbrokers Ltd. is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered in England and Wales at Bond Street House, 14 Clifford Street, London, W1S 4JU. Registered No. 01850105. Member of the Shore Capital group

©2018 SHORE CAPITAL STOCKBROKERS LIMITED

Our website uses necessary cookies in order for it to run. We would also like to use optional analytics cookies to improve the site, by collecting and reporting information on how you use it. These cookies do not directly identify the user and won’t set optional cookies unless they are accepted. For more information on how our site cookies work, please see our Privacy Policy.