Editors’ Note: MarketMinder Europe does not favour any political party or politician. We assess political developments for their potential economic and financial market impact only.
It is probably both a great and a terrible week to be Prime Minister (PM) Boris Johnson. Just this morning, he and wife Carrie welcomed a baby girl, adding a second set of pitter-pattering little feet in 10 Downing Street. Yet the joyous occasion was but a brief respite from the political blowback to the scandal known as Partygate and the latest proposed Covid restrictions for England. The Labour Party is now polling ahead of Johnson’s Conservatives, many Conservative MPs appear to be sharpening their knives, and speculation on Johnson’s ouster is running rampant amongst financial commentators we follow.[i] We won’t wade into that, but we do think political gridlock is the likeliest near-term result, which should keep the UK’s political backdrop for stocks largely benign as the year closes.
Echoing the trend in most of the developed world, the newest COVID restrictions are less draconian than in the past. For now, there is no lockdown, instead bringing restrictions in the country closer to the rest of the UK. The rules include mandatory masking, working from home where possible and vaccine passports for nightclubs and large entertainment venues.[ii] People who come into contact with the virus can now test regularly instead of self-isolating.[iii] In his press conference announcing the restrictions, Johnson alluded to a potential vaccine mandate, but Health Secretary Sajid Javid quickly scratched the idea.[iv] As for the economic impact, we think restrictions will probably hurt leisure, hospitality and retail in city centres, which will once again lose foot traffic from office workers, but businesses aren’t forced to close for now. So overall, the effect appears likely to be quite mild, and UK stocks are (rightly, in our view) taking the restrictions in stride.[v]
But many Tory backbenchers and political commentators seemingly aren’t, as Johnson announced the measures whilst still dealing with the fallout from “Partygate”—revelations that Downing Street staffers held a holiday party last December, despite London’s Tier 2 COVID restrictions. News of other parties has since emerged. Many Tory and Labour MPs—along with much of the press corps—are excoriating the apparent hypocrisy, warning no one will follow COVID restrictions if those setting them seemingly can’t be bothered. Some Westminster insiders we follow estimate the Tory backbench rebellion on these latest restrictions could surpass the revolt over the last round of restrictions.[vi] They will probably still pass, as Labour has signalled support, but losing that much of his base would likely be a huge blow to Johnson’s political capital—a blow arriving on top of the Owen Paterson saga, the fines over the refurbishment of Johnson’s flat in No. 10, and others. Now all eyes are on next Thursday’s North Shropshire by-election, which will be the first real look at how much these events have cost Johnson and his party.
The likelihood this saga triggers a snap election appears low, so we don’t think political uncertainty is suddenly a big risk for UK stocks. If Johnson were to lose a no-confidence motion, the Conservatives’ majority is large enough that they could probably select new leadership and win a fresh confidence vote within the requisite 14 days. In that event, many political commentators we follow think Chancellor of the Exchequer Rishi Sunak would likely become PM, largely extending the status quo policy-wise. Stocks care about policies, not personalities, in our view, so that would probably be a relative non-event for UK stocks.
In the meantime, we think political gridlock is quite likely. In our experience, the more embattled a government becomes, the more self-interested individual MPs become as they grow worried about losing their seats. We think they have a big incentive not to vote for anything that risks alienating their constituents, which should lead to any major initiatives getting watered down or scrapped outright. Already, the government has ditched the unpopular real estate development proposals that many analysts we follow think cost it the Chesham and Amersham by-election this past summer. More U-turns won’t surprise us.
Whilst we have observed voters often have mixed feelings about gridlock, we think stocks love it. Gridlock lowers the risk of big changes to property rights, regulations and redistribution. Whatever anyone’s opinion of these endeavours, we think they create winners and losers, which our research shows often weighs on stocks. When gridlock keeps radical change on these fronts at bay, it reduces uncertainty, which our research finds can boost risk-taking and returns. Politics is only one driver for financial markets, and the UK’s sector and industry makeup will likely have a big influence on returns. But if scandal breeds gridlock, we think that points to UK stocks enjoying a fine political backdrop for the foreseeable future.
[i] Source: Politico, as of 9/12/2021.
[ii] “Covid: New Plan B Rules on Working From Home and Masks Announced for England,” Francesca Gillett and Dulcie Lee, BBC News, 8/12/2021.
[iii] “What Are the Covid Rules and Guidelines in the Four Nations of the UK?” Matthew Weaver, The Guardian, 9/12/2021.
[iv] “Javid Dismisses ‘Ethically Wrong’ Mandatory Vaccinations – After PM Hints at ‘National Conversation’ on Measure,” Ashley Cowburn, The Independent, 9/12/2021.
[v] Source: FactSet, as of 9/12/2021. Statement based on MSCI UK IMI Index returns with net dividends.
[vi] “Government Faces Tory Backbench Revolt Over Plan B Covid Measures,” Peter Walker and Aubrey Allegretti, The Guardian, 9/12/2021.
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