May's End Heralds May's End

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As of mid-morning Friday (PDT), the world still doesn’t have an answer to the biggest question surrounding UK Prime Minister Theresa May: whether she will accept Geri Horner’s (née Halliwell, aka Ginger Spice) invitation to tonight’s opener of the Spice Girls’ reunion tour. However, we do now know May will resign as Conservative Party leader on June 7, assuming the role of caretaker prime minister as her party selects a new leader over the summer. While this is legitimate capital-N news, it also doesn’t signify some huge change. The Conservative Party remains at war with itself. The European Parliament election results, scheduled for release at 10 PM Sunday in the UK, likely show the upstart Brexit Party crushing both the Conservatives and Labour. Parliament still hasn’t passed an EU withdrawal bill, and no one knows what the next iteration of said bill will look like. Nor does anyone know who will be shepherding that bill as prime minister or whether they will try to renegotiate with Brussels. Halloween remains the Brexit deadline—yet no one knows whether this will be the date of a hard Brexit, soft Brexit or another delay. All we know is that a summer of uncertainty looms—and that the sooner this circus ends, bringing clarity to UK businesses and investors, the better off markets are likely to be.

At this point, there are two big questions. First, who will succeed May? Second, will a snap election follow—something Labour leader Jeremy Corbyn pushes for regularly. The answers, of course, are “unknown” and “unknown.” Polls show voters overwhelmingly prefer former London Mayor Boris Johnson, who spearheaded the Brexit campaign and has pushed for a hard Brexit ever since. But the wider Conservative Party base may not get a say, due to the party’s selection rules. Unlike Labour, which lets all party members vote in a free-for-all—which is how Corbyn remains leader despite his lack of Parliamentary support—the Conservatives give their members of Parliament (MPs) first crack. MPs nominate a slate of candidates and then conduct secret votes until just two candidates remain. Those two then go to all registered party members for a vote. The whole process takes about two months.

While polls show voters’ preference, they don’t hint at leadership hopefuls’ parliamentary support. Though Johnson is popular with voters, it isn’t clear a majority of Tory MPs feel the same way about the outspoken former foreign secretary. They could rally instead around former Commons leader Andrea Leadsom, who resigned earlier this week, or Home Secretary Sajid Javid. Former Brexit Secretary Dominic Raab is also reportedly in the mix, as is Environment Secretary Michael Gove. All but Javid favor a harder Brexit, though Javid is noteworthy for attracting support from Remainers and Brexiteers alike. “Wait and see” will have to be investors’ mantra once the leadership race kicks off officially next month. Until the final two nominations are known, there won’t be much use speculating over who is having the most success jockeying for support. Too much of this will happen behind closed doors and in hushed dinners at Parliament’s restaurants.

Speculating over a snap election seems equally fruitless. Corbyn will likely keep calling for one as long as the Conservatives are so far behind Labour in the polls. But he likely also won’t really want one deep down as long as the Brexit Party remains so far ahead of both. Then again, it isn’t Corbyn’s decision. A snap election would require a two-thirds vote in Parliament, and the Conservatives seem unlikely to support it when they are so badly behind—and when their party is so divided. Never say never, of course. No one thought 2017’s snap election was likely. But at this point, it would be quite odd indeed.

As for potential EU renegotiations, “wait and see” applies here, too. EU leaders have ruled this out, but they also ruled out a lot of other things during these negotiations before doing them anyway. It will all depend on who becomes prime minister, what their preference is, and how good their political skills are. We guess it is fair to say a no-deal Brexit on Halloween just became a tad bit more probable, since there is now a chance a hard Brexit supporter could take the reins and run out the clock, bringing a no-deal Brexit by default. But the same parliamentary maneuvers that brought the first two delays could happen again.

Whatever happens, it is becoming increasingly clear to everyone that just getting on with this should be the best medicine for the UK’s economy and markets. As we discussed at length in our coverage of Q1 UK GDP growth, UK businesses spent the beginning of this year stockpiling for a no-deal Brexit that never came. That appears to have created a supply overhang that could take several months to winnow down, disrupting production in the months ahead. Meanwhile, without clarity on the UK’s long-term trade and regulatory relationship with the UK (and by extension the rest of the world), it remains difficult for businesses to make long-term plans. Where do they build new factories? Distribution centers? Research hubs? Will they be in a customs union with the EU, or will their government be free to negotiate its own free-trade deals? Will the UK be able to write its own regulations, or will it be subject to Brussels’ edicts? Absent clarity on these fronts, waiting seems to be the most sensible decision. We suspect that is why UK business investment fell all last year. We wouldn’t expect a meaningful recovery until this uncertainty is gone.

For UK markets, the good news is everything we have written here is widely known. The endless chatter has sapped negative surprise power. There isn’t a potential outcome, good or bad, that pundits haven’t sliced and diced. But uncertainty probably remains a drag, and it is hard to envision UK stocks significantly outperforming the world until it fades. The global bull market probably keeps tugging UK stocks along in the meantime, but we think the end of the Brexit circus—whatever form it takes—is something to look forward to.