Labor's Punchline

Tony Blair is set to step down as Prime Minister. In a statement today, Mr Blair said: "Within the next few weeks I won't be Prime Minister of this country. In all probability, a Scot will become Prime Minister of the United Kingdom."

Brown to be PM in weeks, says Blair
By Graeme Wilson, The Telegraph
https://www.telegraph.co.uk/news/main.jhtml?xml=/news/2007/05/01/nblair301.xml

The "Scot" he's referring to is Gordon Brown. Despite recent headlines of a possible leadership challenge, it's nearly certain Gordon Brown will assume power as Prime Minister, as has been expected for months. Even more importantly, in a regional election the Scottish National Party looks set to win power in elections to be held Thursday (more on this below).

The fascinating part about Brown's ascension is the degree to which he's bumbling his way into the role. Brown's popularity is dismal. From a poorly received budget to potshots on his "Stalinist" management style, Brown is the punchline of every joke. Additionally, the unpopularity of the Labor government, which has fallen deeply out of favor since its Blairite hey-day, isn't doing Mr. Brown much service either.

It's a very peculiar situation: Mr. Brown will almost undoubtedly get the support from his Labor brethren to become Prime Minister, and yet no one seems to like him! (It should be noted that the UK does not have a popular election for the Prime Minister; elected representatives from the dominant party in Parliament select the Prime Minister.)

The issue for investors is political uncertainty. Markets abhor political upheaval; they prefer stasis and gridlock. Today, things look very murky in the UK. It's increasingly likely Brown could end up spending most of his time as Prime Minister fighting for a political mandate and re-election rather than passing laws. This would be good for markets: all political hot air and nothing meaningful. And judging recent poll numbers, Brown will have some ground to make up on David Cameron's Conservative Party. A challenge to his leadership may in fact be welcome, even if it doesn't change the expected outcome. Strong opposition would force Mr. Brown to more clearly outline the policies of a future Brown Labor Party, as these are unclear as of now.

But Brown could just as easily prove incompetent and quickly be ousted—throwing a big wrench in the works.

And, what effect will having a Scot in charge have on the future unity of the United Kingdom? The Scottish National Party favors succession from the UK. As we've written before in this space, it's not entirely out of the question Scotland could depart the Kingdom as early as this year! (See our past commentary "Too Much Scotch?")

But in the end, these scenarios are probably low probability. The market has had ample time to digest Gordon Brown's ascension, and isn't too spooked about it. And, true Scottish independence is ultimately unlikely:

Scotland: Can It Go Nationalist and Still Be British?
By Harry Reid, The Financial Times
https://www.ft.com/cms/s/96c866cc-f41e-11db-88aa-000b5df10621.html

While leadership that's more of a political punchline than a force of legislation is a good thing for stocks, political uncertainty is likely to remain heightened in Britain for some time—a good reason to remain cautious for now on UK investments relative to opportunities in the rest of the world.