What Follows Truss’s 44 Days?

Editors’ Note: MarketMinder Europe prefers no politician nor any party. We assess developments for their potential economic and market impact only.

Forty-four (and a half) days. That is how long Liz Truss served as Prime Minister (PM) before announcing her resignation yesterday, capping a madcap week in Parliament. Now the Conservative Party must hold another leadership contest to determine who will be this year’s third PM. Commentators we follow are tossing names around, along with talk of a snap election, with much chatter about who is and isn’t good for markets. In our view, investors don’t benefit from thinking about the latest political developments in this manner. Whilst recent volatility may seem to imply otherwise, our research suggests stocks don’t care about political personalities or the ideology of who is in charge.^[i] In our view, that is worth keeping in mind for investors as the political circus rolls on.

As you likely know, the replacement process is likely to be short, unlike the months-long contest that determined PM Boris Johnson’s immediate replacement. The party will require all leadership hopefuls to get the backing of at least 100 MPs in order to make the ballot.^[ii] That would mean a maximum of three. In that event, MPs would vote Monday, then put the top two finishers to an online vote of all party members, which would run from Tuesday through Friday. But it is also possible that only one candidate attracts the necessary number of backers, which would negate the need for a vote. Either way, the matter will likely be settled by the end of next week.

Unsurprisingly, we have seen many names flying around, including nearly all of the MPs who stood in the last leadership contest. But, in our view, three seem to have the most traction and highest likelihood of securing 100 backers. One is Sunak, who seems to be riding a wave of buyers’ remorse amongst the party at large. Another is Commons Leader Penny Mordaunt, who did well amongst MPs over the summer before the more libertarian and traditionally conservative wing coalesced around Truss. And rounding out the pack is … Johnson, who has cut short a Caribbean vacation and has already started rallying his supporters, who argue he is the only one with a mandate from voters.^[iii]

We don’t know how all this will shake out, but if the past six weeks are a guide, most observers will focus on the contestants’ ideology and personalities. There will likely be talk of who is good and bad for markets, just as we saw whilst Truss was in charge. When she faced off against Sunak, we witnessed much chatter about his centrism being good for markets and Truss’s purported radicalism being dangerous. Gilt yields jumped after her original Chancellor, Kwasi Kwarteng, released a mini-budget of small tax cuts and modest deregulation.^[iv] They then settled down after Truss fired him, U-turned on most of the mini-budget and installed Jeremy Hunt in his place—oodles of commentators we follow argued Hunt must be markets’ preferred choice.^[v]

To us, it all reeks of bias and groupthink, which took the shape of fiery rhetoric that seemed to roil investor sentiment. Hence, in Truss’s case, UK markets seemed to overreact sharply to what was a very mild set of policy proposals that, in our view, probably wouldn’t have boosted economic growth or sparked runaway inflation.^[vi] Based on our studies of market history, sentiment swings like this usually even out as investors gradually get over their initial reaction, and we think that probably would have happened if the political landscape allowed things to play out. Instead, the U-turn may have created the impression that the market reaction to these policies was legitimate based on the commentary we analysed, rendering a permanent verdict on not only them, but on the ideology behind them. Hence, it appears to us that the myth that stocks do play favourites amongst politicians will live to fight another day.

But in our view, investors benefit from recognising that Truss wasn’t inherently good or bad for markets—nor was Johnson. Sunak and Mordaunt aren’t, and neither are any of the other potential challengers, in our view. Our research shows the Conservatives aren’t inherently better or worse than Labour, which seemingly stands a good chance of winning a snap election if one is called. And in our opinion, Labour isn’t any better or worse for markets under current centre-left leader Keir Starmer than his predecessor, avowed socialist Jeremy Corbyn.

In our experience, what matters for markets is whether whoever is in charge has the influence to pass radical legislation that creates winners and losers and raises uncertainty for businesses. Our research suggests any form of political gridlock, regardless of who heads the government, reduces this legislative risk and helps uncertainty fall. On this front, the future for stocks looks bright to us. High uncertainty seemingly reigns at the moment based on our review of sentiment measures, and it may continue if the next Conservative leader does bow to political pressure to call a snap election. But we think it likely falls before long. As the past weeks have shown, we have seen too many divisions within the Conservative Party to think they are able to pass anything of substance. And if there is a snap election, it will probably resolve many of the current questions and—should Labour win—give markets clarity on its agenda and the likelihood of being able to pass anything big. At the moment, we suspect that likelihood would be low, given the party’s own deep internal divisions, not to mention the possibility that it would have to form a coalition with the centrist Liberal Democrats.

Hence, we think fears of radical government action in the UK that we see splashed all over commentary we follow are overwrought.