Boris Unbound
Thought Leadership
Boris Unbound
Fri 13 Dec 2019
Last night the British public decided to break the parliamentary deadlock which has lasted for over a year and give Boris Johnson a resounding mandate, with nearly 44% of the vote and a comfortable majority after gaining 365 of 650 seats. On the news the Pound surged, as some uncertainty has been removed – markets like a strong government.
Importantly, Mr. Trump was one of the first to congratulate the returning prime minister, offering a trade deal once Brexit is finalised.
The (Brexit) divorce may be considered finalised, both parties agreeing on how to divide the household (post-Brexit rules) and alimony (the UK’s contribution to the EU budget). As any divorcee will tell you, however, when ongoing concerns remain between the former couple (see trade deal), the relationship is never easy.
Over the short term, investors can relax, as the implementation of a transition period defacto delays real Brexit for about a year and averts the possibility of a disorderly Brexit. When the euphoria has settled, however, we feel that challenges for risk assets remain. In our previous note, we suggested that long term uncertainties will persist, as a significant number of challenges lies ahead:
- The Tory party has promised to significantly increase fiscal spending. While it certainly has the room to do so, this should cap gains on Sterling and, all other things being equal, drive yields upwards.
- Mr. Johnson’s “Brexit Deal” may be considered done. But the leaving arrangements were never supposed to be the difficult part. The ensuing trade deal is. Her Majesty’s new government will now have less than a year to deliver a trade deal, which at best takes 3-4 years, or face WTO rules, which may have a significant impact especially in low-margin financial service exports. More importantly –and we will address this in a future article- the WTO’s dispute mechanism has been defanged by the US, which leaves the weaker parties more exposed than previously. So until that regime is clear, capital investment decisions may be further delayed.
- A short-term trade deal with Mr. Trump is certainly a possibility (long term deals need to be ratified by the House and the Senate), but it is important to remember that the US president is now in his final year in office, under impeachment, against a hostile House, with a 40% chance of being re-elected, and only a small window of time before he has to hit the campaign trail. There are no signs whether the era where anti-globalists will be rewarded by a US president may continue after the UK has forever severed ties with the EU.
- Additionally, the SNP’s landslide in Scotland (48 seats, up 13) and the DUP’s losses in N. Ireland, along with the possibility of a border in the Irish Sea, suggest that further pressures on the Union may lie ahead.
However, all these are “known unknowns” for the markets, and therefore, more or less, priced in. Here’s the true question investors have yet to answer: What does Boris “unbound” truly look like?
Mr. Johnson will wake up more empowered than any prime minister since Tony Blair in 1997 and having cleared an obstacle on the road to Brexit Britain. More importantly, he will not be bound to particular caucuses formed within the party (remain or leave). He will be the first Tory Prime Minister who will not be scared of losing his right wing in over a decade, with the UKIP and its successor, the Brexit Party, safely (?) defeated. He will not even be bound by extravagant promises, as the Conservative manifesto had been very restrained. On top of this, his reign may be virtually unopposed as the Labour Party will take some time to recompose itself after the worst showing since 1924.
The new PM asked the public to untie his hands, and that they did. Now, with but a few internal pressures for compromise, the question is: will Boris Johnson be a visionary, with the ability to draw and implement a successful roadmap for post-Brexit Britain? Will he be more amenable to foreign leaders? Will he continue to take a hard stance against the EU? Will he be a “deal maker” or a “gambler”? Will he make post-Brexit Britain an open economy or a castle? More important that all of these, will he face possible threats to the Union successfully?
It may take some time to answer all these questions. Until that time, investors have better be patient, take their gains where they find them, and only make long term bets when visibility over the future is somewhat clearer.
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After an unusually quiet two-year period, investors were once again reminded that volatility is part and parcel of the investment process. Global stocks suffered their worst week since 2016 and the sixth worst overall week since the recovery began in 2009. More importantly, bond prices also fell, as did other traditionally safer assets such as […]
Macroeconomic View – Market Correction
UK Consumer confidence rose in January from -13 to -9, above expectations for the figure to remain flat. Nationwide housing prices year-on-year for January increased to 3.2% from 2.6%, the highest reading since March last year. The BOE’s concern surrounding borrowing was confirmed as consumer credit figures climbed to £1.52bn in December from £1.5bn the […]
Markets sell-off at fastest pace since 2011
By David Baker, Chief Investment Officer After a strong start of the year for equity markets, global stocks shed almost 5% of their value on Friday and Monday. US equities are now 6.2% below their highs, turning negative for the year, as are global equities (-6.5% from their highs). The S&P 500 is now trading […]
Equity Storm in a (Bond) Teacup
Last week marked a 3.5% pullback for global equity markets, the first since 2016. The move comes after a very good month, January, during which equities rose to fresh highs, gaining 5.2%, prompted by exuberance related to the US tax reform. However, the arrival of February marked fresh concerns for investors. First and foremost, economists […]
Macroeconomic View – Weak US Dollar
Dollar weakness persisted last week as ambiguous messaging from the US Government confused investors. Headline capital goods orders (blue) were robust, however the core capital goods component (red), the less cyclical of the two, has continued to weaken since September. UK Average earnings increased from 2.3% to 2.4% year-on-year for the 3 months to November, […]
Market Comment – Macro headwinds
Last year was very positive, both in terms of stock market and macroeconomic volatility (the volatility of macroeconomic releases). In recent weeks, however, we have noticed a deterioration in macroeconomic releases, especially in the US. Lower inventories and higher imports took a toll on GDP. More detailed data on capital expenditure also shows weakness in […]
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