Britain’s Intraparty Gridlock Takes Center Stage

Editors’ Note: MarketMinder prefers no politician nor any political party, and neither do stocks. We assess developments for their potential economic and market impact only.

Falling uncertainty and gridlock. These are the twin political forces we think are likely to help lift stocks over the period ahead—not just in the US, with midterms splitting Congressional control by the slimmest of margins, but across the developed world. In countries with divided coalition governments, like Sweden and Germany, this is probably self-evident. But in nations with—on paper—single-party governments with strong majorities, it is stealthier. Case in point: the UK, where political uncertainty is down bigtime after two leadership changes this fall. That has helped UK stocks jump more than 18% since late September, beating the MSCI World Index by several percentage points over this stretch.^[i] Now the secondary tailwind—gridlock—is taking shape, as divisions within the ruling Conservative Party become clear to all.

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. For those unfamiliar with the intricacies of EU treaties—and if that is you, we envy you—this would entail the UK having free access to the EU’s single market. But, in exchange, it would have to sign on to all EU laws and regulations, including basically all the things the British people voted to get away from when they chose Brexit in 2016. As you might imagine, this did not sit well with a lot of people, including many in the current cabinet and the Conservative Party in general. Prime Minister Rishi Sunak leapt to damage control, vowing this wasn’t under consideration, while Chancellor of the Exchequer Jeremy Hunt said that, while he will seek freer trade with the EU, it won’t include signing on to the bloc’s diktats. Other cabinet ministers and government spokespeople joined the fray, declaring the report categorically untrue.

But even this wasn’t enough. Backbench Conservative Members of Parliament (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. Others bemoaned simply discussing changes to the EU relationship raised uncertainty, pointing out that changing the Brexit agreement signed by former Prime Minister Boris Johnson’s government would reopen contentious negotiations over issues most businesses and observers previously thought were settled. Even Nigel Farage—longtime leader of the Brexit movement—hinted at a return to frontline politics over the issue.

At this point, we think it is a secondary concern whether the rumors are true. Any changes to the UK’s relationship with the EU would take years, and there will be at least one election between now and then. A treaty change would also require a Parliamentary majority, and it isn’t clear 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 skeptical it would go anywhere. At the same time, the rumor’s sheer existence has opened a lot of the Conservative Party’s old wounds, heightening divisions within the party. Not only will this probably 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. The Telegraph reported backbench Conservative MPs called the package of modest tax hikes the “economics of a madhouse” and “more Labour than Labour,” referring to the center-left opposition party’s traditional platform favoring higher taxes.^[ii] A veteran Conservative MP reported grassroots members were bewildered “at seeing things brought forward that are not at all Conservative economically or politically.”^[iii] We won’t weigh in on the sociology here, nor will we take sides—markets stay above this fray, and we think investors are best off doing the same. However, 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.

This party infighting isn’t unique to the Conservatives in Britain. These days, it seems to be the norm, 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 feared (or hoped). It is a stealthier form of gridlock than the traditional partisan variety, and it isn’t as ironclad, but it can forestall sweeping legislation. In our experience, many American investors still have a very hard time seeing that most of the legislation passed by the Biden administration in its first two years was scaled back dramatically from initial proposals. That was true of the infrastructure bill and the bill formerly known as Build Back Better, reborn as the Inflation Reduction Act. Gridlock doesn’t mean nothing passes. Rather, it means that whatever does pass is generally less contentious than the original proposal, creating fewer winners and losers. That watering-down process generally brings markets relief, however subconsciously.

So overall, while squabbling politicians in any country—and from any party—might be annoying, we think they are generally a blessing for stocks. So tune down the noise and cheer the gridlock—just like we think stocks will.