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Investment Insights

Markets barely reacting to new British PM – but Brexit could change everything

Robert Murray

Written by Robert Murray

Thursday 25 July, 2019

Boris Johnson’s appointment was the only certainty in an unpredictable political climate, says Kiwi Wealth Portfolio Manager and Brit, Rob Murray.

BoJo (1)

In a month of surprising news flowing from the UK (a heatwave, England improbably winning the Cricket World Cup) July’s biggest headline turned out to be of little surprise. The widely-held view that Boris Johnson would become the next British Prime Minister came to pass.

 

Have we come to expect bluster from Boris Johnson?

During the Conservative Party leadership campaign (the process by which Conservative Party Members selected the next Prime Minister) Johnson– or BoJo for short - excelled in making headlines about being tough on Brexit, topped up with the standard election fodder of promising the world to British people (more police officers, better health care, more spending on education, better railroads etc etc).

But unsurprisingly he was also predictably short on any meaningful detail in how he intended to achieve these outcomes.

 

The markets barely noticed

Brexit has caused overall instability in the markets since 2016, but in the few days since Johnson became Prime Minister, markets have barely reacted. The FTSE 100 is flat and leading European share markets (including France, Germany and the Eurozone) were all up between 1%-2% - perhaps foreshadowing the eventual Brexit outcome? Futures contracts that had predicted a cut in the UK base rate are largely unchanged.

Markets have effectively absorbed the news, collectively shrugged their shoulders and moved on to wait for the next Brexit headline.

 

So what next for Brexit?

Does “deal or no deal” Johnson even have the ability to crash out on October 31 without an agreement with the EU? In a word, no.

Given the Conservative parliamentary majority is a razor-thin two seats, the scope to ram through unpalatable legislation on such a divisive and critical matter is near impossible.

The current consensus in the UK following Johnson’s appointment is: no progress in negotiations with the EU, Commons blocking a “no-deal” exit, and predictions Johnson will call a general election.

 

The UK could be 'free' of the EU by early 2020

In terms of timing, October 31 is the hard Brexit backstop (the end date of the extension to the first extension). So we could assume that a general election occurs in November, with the EU delaying the Article 50 deadline until mid-January to allow it to take place.

It is clear Johnson wants Brexit.

He was the smiling “we can do it” face of Brexit in 2016. And his first move as PM was to sack half the Cabinet and stuff it with pro-leave / right-leaning hardliners (Jacob Rees-Mogg, Priti Patel among others). Quite the statement of intent. However, as the world has seen with other populist appointments, the democratic checks and balances in place ensure that the desire of any one leader cannot trump an entire Parliamentary or Congressional system.

 

We'll be watching closely for developments

The Kiwi Wealth investment team will continue to monitor Brexit developments.

But in the absence of any real momentum in agreeing a deal, we would expect even further drift and instability in the UK political system and economy.

The upside to this continuing uncertainty is the likelihood of an economic rebound on the back of any positive deal with the EU - given the underinvestment taking place in the UK since the Brexit vote in 2016.

But the way we see it, no deal in any form would be disastrous for the UK economy.

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