Brexit’s Next Act Seems Cast, but the Script Still Looks Missing

Tuesday morning, one tiny piece of UK politics seems a touch clearer: Boris Johnson (or “BoJo” for short)—former Foreign Secretary and London mayor—took 66% of the vote in the Conservative Party’s leadership contest, meaning he will replace Theresa May as Prime Minister. Whilst this sheds a little light on the cast of characters in Brexit’s next act, we don’t think it adds much clarity beyond that. How the UK/EU relationship will look post-Brexit remains unknowable, in our view. Many in our news surveys speculate his victory means no-deal is more likely, but we think this is a vast oversimplification. Though we wish his election cleared the Brexit fog, it doesn’t, in our view.

Johnson was one of Brexit’s chief flagbearers prior to 2016’s referendum and is generally considered a staunch eurosceptic in publications we read regularly. He touted a “do or die” approach to Brexit whilst campaigning, claiming 31 October would be the final date Britain is in the EU—deal or no. Johnson even hinted at doing an end-run around Parliament to accomplish this.^[i] Naturally, given the hyper-focus in Europe on Brexit amongst media we follow, this stole most headlines tied to the campaign.

But this speculation overrates political rhetoric by a wide margin, in our view. For one, Johnson said a lot of things on the campaign trail. Yes, he seemed to occasionally toe a hard line on the EU—which was likely necessary for him to win eurosceptic Tories’ support. He also said he thought the odds of a no-deal Brexit were “a million-to-one against” in late June. Perhaps that is also politicking. (It was also when Johnson’s opponent, Jeremy Hunt, said similarly contradictory things on Brexit.)^[ii] As the old joke goes: How do you know when a politician is lying? Simple—their lips are moving.

Bigger picture, we think the Conservative Party—like most British political parties—is a conflicted mess over Brexit. Monday night, on the eve of his ascension to 10 Downing Street, Johnson seemingly faced a mini-revolt from within his own party, with some openly contemplating a confidence vote if he pushed a no-deal Brexit too hard.^[iii] Several ministers, including Chancellor of the Exchequer Phillip Hammond, Justice Secretary David Gauke and Education Secretary Anne Milton, resigned Tuesday morning.^[iv] More are rumoured to follow.^[v] The Tories’ minority government relies on the support of Northern Ireland’s Democratic Unionist Party to hold power. Even with that, its edge in the House of Commons appears razor thin—it could be as little as two seats if they lose 1 August’s special election in Wales’s Brecon and Radnorshire constituency. The idea Johnson could ram a no-deal Brexit bill through Parliament is laughable, in our view.

We think Johnson knows this, too. That might be why he discussed suspending Parliament to enact a no-deal. Yet Parliament has since passed legislation banning this move—which would likely have faced many legal challenges anyway—probably outflanking Johnson’s end-run around a vote.^[vi]

Hence, Johnson likely needs to find another route. Maybe he successfully renegotiates an exit deal everyone can live with. Maybe he fails to, pushes no-deal Brexit too hard and is ousted in an early fall confidence vote, as some members of Parliament are already threatening. Maybe everyone remains so deadlocked and indecisive that no-deal happens by default. Maybe, perish the thought, politicians get together and delay Brexit beyond Halloween to May Day (or whenever). Maybe a confidence vote spells snap elections. We don’t think the fact BoJo is the new PM answers any of these questions.

We wish it did! As we have documented here often, it isn’t the spectre of no-deal that haunts Britain, in our view. Rather, we think it is British businesses’ and investors’ having no idea how the outcome will look. They have probably planned for multiple outcomes but don’t know which to pursue, freezing deployment. In that vein, getting on with Brexit—however it looks—is likely the key to moving forward. Whether it is idyllic or not matters less, in our view. We think businesses will likely adapt quickly to whatever post-Brexit scenario occurs.

Meanwhile, the doomsday forecasts garnering so many headlines in publications we follow are likely baked into British markets now, given weak UK market performance in recent months.^[vii] If, as seems likely to us, reality isn’t as bad as feared, Brexiting should bring a relief that washes over markets. But we will likely have to wait and see what happens in the coming weeks and months to know when we will get it. Oh, and whether BoJo may even be in office when it comes.