May’s End Heralds May’s End

Editors’ Note: Our political commentary is non-partisan by design. We favour no political party, candidate or elected official in any country and assess political developments solely for their potential economic or financial market impact.

As the month of May closed, the world still didn’t have an answer to the biggest question surrounding Prime Minister Theresa May: whether she would accept Geri Horner’s (née Halliwell, aka Ginger Spice) invitation to the Spice Girls’ reunion tour. However, we do now know May will resign as Conservative Party leader on 7 June, assuming the role of caretaker prime minister as her party selects a new leader over the summer. Whilst this is big news, we don’t think it signifies some huge change. The Conservative Party remains beset with internal divisions. Parliament still hasn’t passed an EU withdrawal bill, and no one knows what the next iteration of said bill will look like. Nor does anyone know who will be shepherding that bill as prime minister or whether they will try to renegotiate with Brussels. Halloween remains the Brexit deadline—yet no one knows whether this will be the date of a hard Brexit, soft Brexit or another delay. It seems to us a summer of uncertainty looms—and in our view, the sooner this circus ends, bringing clarity to UK businesses and investors, the better off equity markets are likely to be.

At this point, we see two big questions. First, who will succeed May? Second, will a snap election follow—something Labour leader Jeremy Corbyn pushes for regularly. The answers, in our view, are “unknown” and “unknown.” Polls show voters overwhelmingly prefer former London Mayor Boris Johnson, who spearheaded the Brexit campaign and has pushed for a hard Brexit ever since. But the wider Conservative Party base may not get a say, due to the party’s selection rules. Unlike Labour, which lets all party members vote in a free-for-all—which is how Corbyn became leader despite not having MPs’ broad backing—the Conservatives give their MPs first crack. MPs nominate a slate of candidates and then conduct secret votes until just two candidates remain. Those two then go to all registered party members for a vote. The whole process typically takes about two months.

Whilst polls show voters’ preference, they don’t hint at leadership hopefuls’ support amongst MPs. Though Johnson is popular with voters, it isn’t clear a majority of Tory MPs feel the same way about the outspoken former foreign secretary. They could rally instead around former Commons leader Andrea Leadsom, who resigned earlier last week, or Home Secretary Sajid Javid. Former Brexit Secretary Dominic Raab is also reportedly in the mix, as is Environment Secretary Michael Gove. All but Javid have said they favour a harder Brexit, though Javid is noteworthy for attracting support from Remainers and Brexiteers alike. We suspect “wait and see” will be the name of the game once the leadership race kicks off officially next month. Until the final two nominations are known, we think there won’t be much use speculating over who is having the most success jostling for support. Too much of this will happen behind closed doors and in hushed dinners at Parliament’s restaurants.

Speculating over a snap election seems equally fruitless, in our view. If the recent past is any guide, Corbyn may keep calling for one as long as the Conservatives are so far behind Labour in national election polls, which may favour the traditional parties more than last week’s European Parliamentary election did. However, as long as the Brexit Party remains so far ahead of both Labour and the Conservatives, it seems difficult to imagine anything more than a half-hearted push. Plus, it isn’t Corbyn’s decision. A snap election would require a two-thirds vote in Parliament, and the Conservatives seem unlikely to support it when they are so badly behind—and when their party is so divided. Never say never, of course. Throughout the media coverage we read at the time, few pundits thought 2017’s snap election was likely. But at this point, we think it would be quite odd indeed.

As for potential EU renegotiations, we think “wait and see” applies here, too. EU leaders have told reporters fresh negotiations aren’t an option, but they also ruled out a lot of other things during these negotiations before doing them anyway. It will probably all depend on who becomes prime minister, what their preference is, and how good their political skills are. We guess it is fair to say a no-deal Brexit on Halloween just became a tad bit more probable, since there is now a chance a hard Brexit supporter could take the reins and run out the clock, bringing a no-deal Brexit by default. But the same parliamentary manoeuvers that brought the first two delays could happen again.

Whatever happens, it is seemingly becoming increasingly clear to many financial pundits that just getting on with Brexit should be helpful for the UK’s economy and markets. As the ONS’s report of Q1 gross domestic product (GDP, a government-produced estimate of national economic output) showed, UK businesses seemingly spent the beginning of this year stockpiling for a no-deal Brexit that never came. That appears to have created a supply overhang that could take several months to winnow down, potentially disrupting production in the months ahead. Meanwhile, without clarity on the UK’s long-term trade and regulatory relationship with the UK (and by extension the rest of the world), it likely remains difficult for businesses to make long-term plans. Where do they build new factories? Distribution centres? Research hubs? Will they be in a customs union with the EU, or will their government be free to negotiate its own free-trade deals? Will the UK be able to write its own regulations, or will it be subject to Brussels’ edicts? Amidst a lack of clarity on these fronts, waiting seems to be the most sensible decision. We suspect that is why UK business investment fell all last year.^[i] We wouldn’t expect a meaningful recovery until this uncertainty is gone.

For UK markets, we think the good news is everything we have written here is widely known. The endless chatter has likely sapped negative surprise power. In our view, there isn’t a potential outcome, good or bad, that pundits haven’t sliced and diced. But we think uncertainty probably remains a drag, and it is hard to envisage UK shares significantly outperforming the world until it fades. We think the global bull market is likely to keep tugging UK shares along in the meantime, but we think the end of the Brexit circus—whatever form it takes—is something for equity markets to look forward to.