Another UK Election Surprise

Editors’ Note: Our political commentary is intentionally non-partisan and aims to assess developments exclusively for their market impact. In our view, no politician nor any party is preferable for markets and partisan bias is blinding—a source of investing error.

The fat lady has sung, the curtain has fallen, the results are pouring in and unless something radical happens while we catch a few winks, Prime Minister Boris Johnson’s Conservative Party is on track to win its biggest majority since the Thatcher years. That is miles away from the narrow victory many expected, though it is so far in line with the exit poll (which showed an 86 seat majority for the Conservatives), and the national popular vote is largely in line with the pre-election polls. There was another shock in Scotland, where the Scottish National Party (SNP) wiped out most of the Tories’ gains two years ago, opening the door to a contentious battle with Johnson over a second independence referendum. So this election didn’t obliterate political uncertainty, much as we thought it wouldn’t. But it did give pro-Brexit lawmakers enough of a cushion to make an exit without further delay a foregone conclusion, which should largely evaporate the dark cloud of uncertainty that has loomed over the UK economy and markets for two  and a half years. We think this is bullish for stocks, though the Tories’ strong majority also erases gridlock, which may dampen the tailwinds as Brexit fades into the rearview.

The official exit poll, which takes into account constituencies as well as the national popular vote, projected the Tories winning an 86-seat majority. As we write, the BBC has ratcheted that down a bit, projecting 362 seats for the Tories, 199 for Labour, 52 for the SNP, 13 for the Liberal Democrats (Lib-Dems), 4 for Plaid Cymru (the Welsh nationalist party), 1 for the Greens and 0 for the Brexit Party.^[i] In Northern Ireland, it is looking rather bad for the Democratic Unionist Party, which propped up the last Conservative government, as the pro-Remain nationalist parties banded together to avoid splitting the vote. Lib-Dem leader Jo Swinson lost her seat to the SNP. Nick the Brick, Lord Buckethead and the guy dressed as Elmo came nowhere close to victory, but they sure looked good on stage and made us wish US elections had a similar touch of whimsy.

Presuming Johnson gets somewhere in the neighborhood of the BBC’s projection, he should have no further trouble getting his Brexit deal through Parliament this time, keeping Brexit on track for the January 31 deadline. Conservative HQ indicated he will  present the bill for its first reading next week, leaving a few weeks for amendments, final passage and royal assent. Considering the anti-Brexit Tory Members of Parliament (MPs) have either stood down or left the party, we shouldn’t see the sort of internal rebellion that plagued Johnson’s last attempt to pass his deal. However, hard Brexiters may feel empowered by the result, which may lead to some amendment drama after Christmas. Ultimately, though, that faction is highly, highly unlikely to do anything that would stop Brexit, it seems quite likely the UK will be out of the EU by February 1.

Yet this won’t end Brexit’s hold over politics. For one, the transition agreement will be in place until December 2020. More importantly, that is also the deadline for the UK and EU to have a new trade deal in place. We suspect this issue will hog Johnson’s attention for the foreseeable future as negotiators get down to brass tacks, but we don’t think it represents the same degree of uncertainty as all this year’s Brexit unknowns. Johnson’s deal already resolved key issues like customs, the biggest headache in supply chain management. The trade deal will include tariffs, which aren’t insignificant, but the baseline is trade reverting to WTO terms—not at all onerous. Some businesses may still decide to delay long-term projects just in case, but investors should be able to get on with it.

Once Brexit is out of the way, things potentially get a bit sticky. For the first time in a decade, the UK won’t have gridlock. A Conservative government with a majority of a few dozen seats probably won’t have much trouble fulfilling most of its election manifesto. On the bright side, there was nothing terribly frightening in that document—nothing that, as far as we could tell, would radically shift property rights. Yet the devil is always in the details. Should Johnson’s government pass a flurry of domestic legislation, it may make UK stocks more risk averse as they consider winners, losers and potential unintended consequences. It is also worth noting the Tories’ manifesto dashed investors’ hopes for big tax cuts and other allegedly pro-market reforms. Yet in the past few days, we have seen a number of articles touting the potential for an astoundingly pro-business government. If that is the prevailing sentiment, then stocks may have to deal with some disappointment. Only time will tell.

As for Labour, this was a bad night. Corbyn didn’t step down immediately, but he did state this will be his last election as party leader. Winning 199 seats would be the party’s worst showing since the 1930s. It recalls 1983, when the party—under Michael Foot’s leadership—ran on a manifesto with a similarly strong socialist bent. When Thatcher won a landslide and reduced Labour to 209 seats, that manifesto went down as the “longest suicide note in history.” It would therefore seem easy to draw a parallel with today and presume voters again rejected socialism with a strong Marxist bent, but there are competing narratives. Labour’s endorsement of a second Brexit referendum likely had an impact. Throughout the night’s media coverage, the party seemed divided on who to blame. Corbyn’s acolytes took the “Blame Brexit” tack, while Labour MPs from the Tony Blair and Gordon Brown generation were more circumspect, admitting constituents had reservations about Corbyn’s leadership and Labour’s manifesto. In his speech after winning re-election in his Islington North constituency, Corbyn stood by Labour’s manifesto, deemed its policies “extremely popular” during the campaign and across the country, and blamed Brexit for overriding “normal political debate.”

The key question for the party’s future: Will Corbynism remain the party’s platform, or will it turn back toward the center? The latter happened after 1983, the year Blair entered Parliament (his former seat fell to the Tories tonight). But Corbyn’s disciples control much of the party machinery. He also stated his intent to continue leading the party through a period of “reflection” on the result and deciding which policies the party should pursue. That sounds to us like a politician keen on preserving his influence, though we wouldn’t leap to any conclusions. The only Labour heartland that remained near-universally red was South Wales, aka coal country. The party’s famed “Red Wall” in industrial North England crumbled quite badly, with the Tories taking seats Labour had held for decades. We suspect the party’s soul searching will include many conversations with the voters who flipped, to see if it was party leadership, party policy, party values, Brexit or all four. With the issue so complex, we don’t think it makes much sense to try to speculate on the party’s long-term future today. Moreover, however it evolves, the next election isn’t due until late 2024—too far ahead for markets to deal with now.

The other major question—Scotland—also is likely too far out. The SNP’s landslide shocked pundits, as most thought SNP leader and Scottish First Minister Nicola Sturgeon was being too optimistic when she claimed her party could win 50 or more of the country’s 59 constituencies. Former Scottish Tory leader Ruth Davidson was so convinced it couldn’t happen, she penned an op-ed in The Telegraph pledging to skinny dip in Loch Ness if the SNP won 50 seats. If the present projection holds, for her sake, we hope she can find a cop-out similar to former Lib-Dem leader Paddy Ashdown, who ate a hat-shaped cake after famously pledging to eat his hat if the polls showing his party would lose 47 seats in 2015 proved correct.

After the exit poll, Sturgeon said the SNP’s near-sweep made a second Scottish independence referendum inevitable, citing the Conservative campaign’s focus on preserving the union. Michael Gove, a member of Johnson’s cabinet, quickly disagreed, setting up a showdown between Westminster and the Scottish Parliament. We won’t even try to handicap the outcome, although it seems unlikely that a government headed by a party whose full name is the Conservative and Unionist Party will bless a second independence vote.

The last interesting wrinkle has to do with America’s presidential election—specifically, the Democratic primary race. We suspect Bernie Sanders, Elizabeth Warren and all the rest are watching closely tonight. How will Labour’s shellacking influence their campaigns? UK elections have been something of a bellwether for the US in recent years—most notably with the Brexit vote, which previewed the Rust Belt victories that swung the Electoral College for President Trump in 2016. Will Sanders and Warren see tonight’s result as a repudiation of more extreme policies and adjust their messaging accordingly? Will Joe Biden, Mike Bloomberg or Deval Patrick argue the Democrats need to nominate someone with their centrist credentials in order to prevent a similar drubbing next November? This will be interesting to watch.