The possibility of the United Kingdom leaving the European Union without a deal in place can be ruled out, according to a senior Credit Suisse banker.
There’s no appetite among the electorate — as well as the members of the U.K. parliament — for a so-called no-deal Brexit, Andrew Garthwaite, global head of equity strategy at Credit Suisse, said on Monday.
“It seems extremely unlikely we get a no-deal Brexit. The closest we can get to that is the Malthouse compromise on the Northern Irish backstop, which is looking for a technological solution,” he told CNBC’s Nancy Hungerford at the Credit Suisse Asian Investment Conference in Hong Kong. “It is a deal, with a no-deal Brexit.”
The so-called Malthouse compromise is a Brexit plan that addresses the border separating Northern Ireland and the Republic of Ireland — it is an important and contentious part of the negotiations with the EU.
Currently, there are no customs or regulatory checks on goods passing between the Republic of Ireland and Northern Ireland, which is part of the U.K. Due to the EU’s single market and customs union arrangements, people, goods and services can easily cross the border, with both nations following a similar set of rules and regulations.
There are, however, fears on all sides that Britain’s departure from the EU could lead to an increase in safety checks, delays and surveillance at the crossing points on the island.
EU leaders have warned that the U.K. has one final opportunity to leave the bloc in an orderly fashion, after agreeing to delay the departure date beyond March 29.
Markets will likely rally if a Brexit deal can pass the British Parliament.
“In the U.K., around three-quarters of earnings come from overseas. So, if sterling goes up, the market will underperform,” Garthwaite said, adding that he is overweight on U.K. equities in dollar terms.
In recent sessions, global markets have tumbled amid fears that a recession is on the horizon. That happened following an inversion of part of the U.S. Treasury yield curve, which is considered an important economic downturn indicator.
An inverted yield curve happens when long-term debt with the same credit quality has a lower yield — or earnings from an investment over a given period — than its short-term counterpart.
Historically, inverted yield curves have been able to accurately predict economic recessions. This time, it is unlikely to be any different, according to Garthwaite.
“I think it is a clear warning signal,” he said. “The last three occasions in the yield curve’s inverted, back in ’89, 2000 and 2006, on each occasion the majority of the people I’ve spoken to said, ‘Yes, this time, it’s different.’ And it wasn’t.”
Garthwaite added that the inverted yield curve has been able to successfully predict every private sector recession in the last 52 years, as well as six out of seven overall recessions.
“What I would say before we get too gloomy on it is, equities typically do well in the first six months after an inverse in yield curve,” he said. “Typically, the down market occurs 12 to 18 months after inverted yield curves. You’ve got a little bit of breathing space.”
