Tinker, Tailor, Soldier… Huawei?

Wed 05 Feb 2020

When I began writing this blog my thesis was clear: Boris Johnson’s embrace of Donald Trump’s bilateralism could be leaving Britain exposed to the possibility of being squeezed from the east and west by two giants, the United States and the European Union, both of whom command significantly more political and economic clout on the world stage than the UK. But antagonising the EU on trade and the US on intelligence simultaneously, coupled with the PM’s often blunt choice of words, could see Brexit Britain isolated on two fronts. The government’s choice to use Huawei for parts of its 5G network and the American rebuke that followed made this an easy –if uncomfortable- case study.

However, the more I thought about it the more I see that this particular onion has many layers to peel. This is a multi-level chess game, touching politics, intelligence and trade, and a move in each field directly affects the other two. So, to assess the ultimate impact on risk assets, we need to carefully peel through each layer and their interactions.

The political game

First and foremost, what needs attention is the personality of the new PM himself. Aristotle once posited that man is either a “political animal”, endowed with the power of speech and rationalisation and thus by nature embroiled in a body politic, or a “lonely bird” flying alone. Whatever the criticism, few doubt that Mr. Johnson is the former, and a particularly adaptable type too. We have often made the case in the past three years that the post WWII multi-lateral global order was changing, as the US President opted for simpler bilateral and interpersonal relationships. Solutions for global problems were not to be found in global forums, but rather in intense New York-style negotiations, where, in the philosophy of the fictional “Suits” superstar, Harvey Specter, what matters is not so much “playing the game” but rather “playing the man”. In the onset of his political rise, even before assuming the premiership, Mr. Johnson saw fit to build a personal relationship with the world leader. Hence, despite a great many warning signs, as well as the fallout from the intelligence community and Congress, the White House has been mostly silent and has not attacked the British government. It seems that Mr. Johnson’s personal relationship paid off. It also seems this is a pattern with the current US foreign policy regime. Despite Congress and other vendors of power issuing warnings to Turkey, or Russia, Mr. Trump will often significantly and uncharacteristically curtail his verboseness where a strong personal rapport has been established. So, point for the British Government, who have adapted to their times.

The intelligence game

The intelligence community believes that the threat to Western intelligence by the British choice to grant Huawei access to parts of its 5G network is real, as it may leave sensitive information open to hacking. Senator Tom Cotton (Republican from Arkansas), introduced a bill earlier in the year which would stop the US from sharing intelligence with countries that use Huawei equipment for their 5G network. He was quoted saying “I’m afraid the UK has left the embrace of Brussels, only to cede sovereignty to Beijing”. However, it would be too simplistic to think that this would be the end of it. The US-UK intelligence sharing survived Kim Philby, the British Head of Soviet-Counterintelligence, who was exposed to be working for the KGB in the 50’s. It survived Donald McLean and Melitta Norwood who passed on the secrets of the Atomic and Hydrogen bombs to Moscow. It survived the John Profumo scandal. It even survived Aldrich Ames, the US Counterintelligence Head and Soviet spy. The truth is that the world of intelligence sharing works on a need-to-know basis, and when there’s a real need to know information will be shared one way or another. In the 1962 Cuban Missile crisis, the US and Soviet intelligence agencies took it on themselves to bring the world back from the brink, talking directly with each other. It would be, therefore, simplistic to assume that critical information which has been seamlessly flowing between the US and the UK since WWII would suddenly stop, especially if the US President and UK Prime Minister would want that to continue.

The trade game

The UK is currently running an almost balanced trade relationship with the US, having a small $4 Billion trade deficit. The two economies are closely aligned, with similar growth trends and interest rate levels. Recently, however, a meeting between Sajid Javid and Steve Mnuchin, the US Treasury Secretary, revealed a rift over the UK’s intentions to impose a digital tax which could directly hurt US tech juggernauts including Google and Amazon. Subsequently, the US Secretary threatened tariffs on British Cars –Anglo-American exports account for almost a fifth of overall car exports (the EU represents about 50%), to a value of $8b, but given the UK is running a trade deficit on cars the repercussions might not be that severe. Will the President’s and the PM’s personal relationship be once again enough to save the “special relationship”? The recent patterns of behaviour on both sides suggest so.

What does it all mean for investors?

We don’t believe that the Huawei issue should, or even would, distract, from the main investment case for British risk assets: stocks valuations are low compared to their averages, and whilst the EU-UK trade negotiations last throughout the year, there’s a decent probability that we could see an upward re-rating in UK equities as more Brexit uncertainty is removed. The intelligence game is deep and by design kept outside the sphere of public scrutiny, unavailable for meaningful analysis by outsiders, and should thus not influence investment decisions. The trade game, additionally, will probably be influenced by many exogenous factors.

The risks to our thesis

The main risk to this benign thesis is of course another change of tack by the US, more likely than not if the ballot in November yields a Democratic President. The return to the multilateralism of the Obama, Clinton, Bush and Reagan eras, would reduce the effectiveness of the British PM’s personal charisma. Additionally, a Britain away from a position of influence in European affairs could, eventually, find itself not squeezed from the grown-up table, but potentially less influential. However, as noted, the old world order is in flux and an adaptable Prime Minister is an asset. So whilst there are risks, at this point we would put them under the heading “manageable”.