Ben Brettell 11 January 2019
Next week sees the long-awaited ‘meaningful vote’ on Theresa May’s Brexit deal. But how do we assess the chances of it getting through Parliament?
Beyond that a whole host of political questions remain unanswered. Will there be a general election this year? Or a second referendum? When will Theresa May step aside, and who will replace her?
I’m afraid I don’t have the answer to any of these questions. But one way to cut through the noise and look at the most likely outcome is to consider the betting markets.
The odds don't simply reflect the bookmakers' opinions on what might happen. They’re formed by weight of money – in effect they gather the collective opinion of those willing to back their judgement with cold, hard cash. In fact in this day and age the bookmakers' odds are often led by the betting exchanges, like Betfair, where one punter can wager with another directly.
The theory is that the collective wisdom of the crowd is greater than that of political commentators, or indeed opinion polls.
All known information is reflected in these markets, and those betting significant sums (and therefore having most influence on the odds), are likely to be those who have taken most information into account.
Did the markets call the 2016 referendum ‘wrong’?
Some will point to the fact that the betting markets got the EU referendum ‘wrong’.
But this is a misguided way of thinking about probability. On the eve of the referendum the betting suggested around a 15% chance of a ‘leave’ vote – not a zero chance. 15% is around the probability of getting a six on the roll of a die – an outcome which surprises nobody when it happens, and certainly doesn’t mean the odds were ‘wrong’.
Here’s what the markets are saying at the moment. Bear in mind the probabilities will often add to more than 100% because of the bookmakers’ margin built into the market. Odds correct as at 8 January, sourced from Oddschecker unless stated.
Will the Commons back Theresa May's deal?
- Yes: 5/1 (17%)
- No: 1/10 (91%)
Once you correct for the bookmaker’s margin in this market, you end up with around a 15% chance of the vote passing. With plenty of Tory MPs on record as saying they’ll vote against, a 15% chance is perhaps surprisingly high. May will be hoping her plan of ‘running down the clock’ (so the choice is between her deal and no deal) persuades enough of them to change their mind.
William Hill are allowing punters to bet on how many MPs will vote aye to the deal, with their under/over line set at 237.5. This means in theory there’s an equal chance of the number being above or below this. It certainly implies May has work to do if she wants to win next week.
Will there be a second referendum?
- Yes: 7/4 (36%)
- No: 4/7 (64%)
A significant chance of a second referendum is factored in here, despite neither of the main parties publically backing one.
Theresa May’s exit date:
- 2019: 4/9 (69%)
- 2020 or later: 9/4 (31%)
May has signalled she’ll step down before the next general election – but her exit date is still uncertain. The markets say she’s most likely to step down this year, but there’s roughly a one-in-three chance of her soldiering on to 2020 or beyond.
Year of next election
- 2019: 6/4 (40%)
- 2020: 5/1 (17%)
- 2021: 15/2 (12%)
- 2022 or later: 2/1 (33%)
The two most likely outcomes are an election this year and the parliament running to its full five-year term.
Next Conservative leader
No clear favourite here – which either tells us that none of the protagonists have amassed enough support to mount a leadership challenge at this stage, or that nobody wants the job!
Sajid Javid and Boris Johnson are joint favourites at 13/2 (13%), Dominic Raab and Jeremy Hunt are next in at 9/1 (10%). Michael Gove is a 12/1 shot (8%).
What does all this mean for my investments?
Nadeem Umar, Research Editor
The betting markets need uncertainty in order to exist. But stock markets tend to react badly to political instability, which is why we’re seeing heightened volatility at the moment.
That said, the markets are usually worried about something – think back to the string of elections and referendums we’ve seen on both sides of the Atlantic over the past few years. The lesson is that markets can rise despite uncertainty, though there will be short-term ups and downs.
Over the longer term, share prices are driven by the prospects for companies – not politics. So while volatile markets take the headlines, they can also offer opportunity.
For those still building their wealth, market falls mean your chosen investments just got cheaper. Provided you can stomach the prospect of sharp market movements, you could think about increasing or adding to your investments, if you’re comfortable with the risks. It will probably be a bumpy ride in the short term, which is why an outlook of five years plus is essential.