With media newsrooms transfixed by the glare of late-night and late-in-the-day Brexit negotiations, one development that gets less coverage is a rising groundswell of support among MEPs in Brussels in favour of keeping Britain in the EU. In January, and a day before Theresa May’s draft Brexit deal was defeated in the Commons, 100 MEPs called on Britain to stay in an open letter to the German media1.

The consequences of following that advice in UK parliamentary terms might be monumental, but that’s not to say it couldn’t happen. Back in December, the European Court of Justice indicated Britain could unilaterally revoke Article 50 and not suffer any penalties for doing so. This perhaps third-most-likely scenario after a withdrawal agreement or no deal Brexit deserves some consideration.

Honda – which confirmed last week it will close its plant in Swindon – and Nissan – which has counted Brexit as a reason for not building a new SUV model in Sunderland – are, in all likelihood, choosing not to factor in such a possibility2.

It’s true the attractions of returning production to Japan have grown ever since the EU agreed to remove tariffs on Japanese cars and car parts in December3. However, it’s also important to remember why companies like Honda and Nissan decided to invest in the UK in the first place: It was largely to gain tariff-free access to Europe.

Honda was welcomed into Britain in 1980 by Margaret Thatcher’s administration. The initial plan was to form a partnership with Rover – the remnants of the ailing British Leyland car company – and it worked. Her selling point was access to Europe. Nearly 40 years later and a month before Brexit day, the company exits Swindon.

While official figures show foreign investment in the UK has stayed strong since the Brexit vote in 2016 – in fact, it ran at record levels in 2017 – there’s no guarantee that momentum will be maintained4.

In any case, the weakness of the pound may have accounted for some of the UK’s investment appeal in 2017, as assets became cheaper in foreign currency terms. Moreover, a recent analysis carried out at Sussex University concluded foreign investment has already started to fall5.

Sterling weakness has also so far helped UK exporters and, therefore, FTSE 100 companies, because most of these earn the majority of their revenues from overseas. The effects for medium sized companies will have been more mixed, since about half of their revenues remain domestic6.

Smaller companies have lagged larger ones over the past year by a small margin7. The Times reported this week that banks are now working with a number of business bodies, including the Federation of Small Businesses, to help make contingency plans for after 29 March8.

Were Brexit to be called off, we might expect some of the recent trends we have seen begin to shift into reverse. For example, staying in the EU could be a negative for FTSE 100 companies on a relative basis, but a distinct positive for smaller businesses. With valuations currently looking undemanding, the latter might really come into their own9.

Investing is all about taking measured risks in order to achieve a good return. Risks are not all one way either. Better than expected news can inspire unexpectedly positive market movements, just as “shocks” – a term used by the governor of the Bank of England earlier this month to characterise a no deal Brexit – tend to cause markets to fall10.

In short, it’s the unexpected that moves markets, far more so than the upside and downside risks we already know about. And what could be more unexpected than a quick clarification of the immediate outlook for UK companies?

That’s one good reason for investors not to align all their investments to one particular version of future events. Being prepared to account for the unexpected is a sensible step to take.

Deutsche Welle, 14.01.19
BBC News, 18.02.19
Reuters, 12.12.18
GOV.UK, 04.12.18
UK Trade Policy Observatory, 31.10.18
FTSE Russell, May 2017
FTSE Russell, 31.01.19
The Times, 19.02.19
MSCI, 31.01.19
10 BBC News, 12.02.19

Important information

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