Editors’ Note: MarketMinder Europe favours no politician nor any political party, assessing developments solely for their potential market and economic impact.
Falling uncertainty and gridlock. These are the twin political forces we think are likely to help lift stocks over the period ahead—in the US, midterm elections split Congressional control by the slimmest of margins.[i] Divided coalition governments, like Sweden’s or Germany’s, may also make gridlock self-evident. But in nations with single-party governments with strong majorities—on paper—it is stealthier, in our experience. Case in point: the UK, where our research suggests political uncertainty has dropped off after this fall’s leadership reshuffling. We think this has helped UK stocks rise more than 7% since late September, beating the MSCI World Index by several percentage points over this stretch.[ii] Now the secondary tailwind—gridlock—is taking shape, in our view, as divisions within the Conservative Party become clear to all.
In our view, the internal strife, as ever, centers on two fronts: fiscal policy and—sigh—Brexit. Starting with the latter, over the weekend, the ever-reliable unnamed senior government sources told The Sunday Times that the UK would embark on a path to sign a Swiss-style deal with the EU within the next decade.[iii] The deal would entail the UK having free trade access to the EU’s single market, but in exchange, it would have to sign on to all EU laws and regulations. As you might imagine, this did not sit well with a lot of people, including many in the current cabinet. Prime Minister Rishi Sunak leapt to damage control, vowing this wasn’t under consideration, whilst Chancellor of the Exchequer Jeremy Hunt said that, whilst he will seek freer trade with the EU, it won’t include signing on to the bloc’s diktats.[iv] Other cabinet ministers and government spokespeople joined the fray, declaring the report categorically untrue.[v]
But, based on fallout since, it seems even this wasn’t enough. Coverage we reviewed showed backbench Conservative MPs and grassroots party members alike pointed out that even focusing on EU trade counters one of the big stated aims in Brexit: becoming a more globally focused country seeking more opportunities in North America and Asia rather than wedding itself to EU demand. We have seen others bemoan simply discussing changes to the EU relationship raised uncertainty, pointing out that changing the Brexit agreement signed by Boris Johnson’s government would reopen contentious negotiations over issues most businesses and observers previously thought were settled. Even longtime Brexit leader Nigel Farage hinted at a return to frontline politics over the issue.[vi]
At this point, we think it is a secondary concern whether the rumours are true. Any changes to the UK’s relationship with the EU would likely take years, and there will be at least one election between now and then. A treaty change would also require a Parliamentary majority, and we have not seen sufficient evidence that the pro-EU movement has anywhere near enough MPs to pass it. So even if some in the cabinet wanted to push it, we are sceptical it would go anywhere. At the same time, the rumour’s sheer existence has seemingly opened a lot of the Conservative Party’s old wounds, heightening divisions within the party. We find it probable this will not only preoccupy the government and backbench MPs alike for the foreseeable future, but the divisions will probably spill over into other arenas.
Arenas like fiscal policy, which we are also seeing in the fierce backlash to last week’s Autumn Statement. Several commentators we follow reported backbench Conservative MPs called the package of modest tax hikes the “economics of a madhouse” and “more Labour than Labour,” referring to the centre-left opposition party’s traditional platform favouring higher taxes.[vii] We won’t weigh in on the sociology here, nor will we take sides—in our view, markets stay above this fray, and we think investors benefit most by doing the same. However, we think the more this discontent festers, the less likely it becomes that the Autumn Statement’s fiscal policies pass exactly as Hunt presented them last week. Even Conservative Party Chairman Nadhim Zahawi’s assertion that the party will still seek to cut taxes before the next election, which is due by January 2025, doesn’t seem to have mollified the party.[viii]
In our experience, this party infighting isn’t unique to the Conservatives in Britain. These days, it seems to be the norm in developed nation politics, and it can lead to intraparty gridlock, where divisions within the ruling party force big bills to get watered down from their initial form, resulting in laws that are less radical than originally imagined (or hoped). In our view, it is a stealthier form of gridlock than the traditional partisan variety, and whilst it isn’t as ironclad, we still think it can forestall sweeping legislation. In our experience, many American investors have had a very hard time seeing that most of the legislation passed by President Joe Biden’s administration in its first two years was scaled back dramatically from initial proposals. gridlock means nothing passes, but rather we think it means that whatever does pass is generally less contentious than the original proposal, creating fewer winners and losers. Our research suggests that watering-down process generally brings markets relief, however subconsciously.
So overall, whilst squabbling politicians in any country—and from any party—might be annoying, we think they are generally a blessing for stocks. So in our view, investors benefit from tuning down the noise and cheering the gridlock—just like we think stocks will.
[i] “US Midterm Elections Results 2022,” Antonio Voce, Seán Clarke, Niels de Hoog and Anna Leach, The Guardian, 15/11/2022.
[ii] Source: FactSet, as of 22/11/2022. MSCI UK IMI return with gross dividends and MSCI World Index return with net dividends, 27/9/2022 – 22/11/2022.
[iii] “Brexit: Who Wants a Swiss-Style EU Deal and What Would it Look Like?” Aubrey Allegretti, The Guardian, 20/11/2022.
[iv] “Brexit: Rishi Sunak Rules Out Deal that Relies on EU Law Alignment,” Staff, BBC, 21/11/2022.
[v] “Rishi Says Claims Government Wants 'Swiss-Style' Deal with EU are 'Categorically Untrue' as He Scrambles to Scrambles to Defuse Tory Civil War on Brexit - Amid Fears UK Could Accept Bloc's Law and Higher Immigration,” James Tapsfield, Daily Mail, 20/11/2022.
[vi] “Nigel Farage Teases Return to Political Front Lines as Rishi Sunak Denies 'Swiss-style' Brexit Deal Change,” Peter Aitken, Fox News, 23/11/2022.
[vii] “Tories Want to Cut Taxes Before Next Election, Says Nadhim Zahawi,” Tony Diver and Will Hazell, The Telegraph, 11/19/2022. Accessed via MSN.com.
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