Today in Brexit, Day 1,224

Editors’ Note: Our political commentary is intentionally non-partisan. We favor no political party, candidate, policy or program. We assess political developments solely for their potential economic and market impact and believe political bias invites investing errors.

Trick or treat! Today is Halloween, and the UK is still in the EU. Yes, three days ago, EU leaders agreed to give the UK a Brexit “flextension,” delaying departure until January 31 or Parliament’s passage of Prime Minister Boris Johnson’s Brexit deal, whichever comes first. We are happy to report Johnson is not dead in a ditch, contrary to his hyperbolic statement about where he would rather be than in the EU after today. Instead, he is campaigning for an election! That contest will happen on December 12, and it presents a shiny opportunity for Brexit-related uncertainty to finally begin fading—potentially a nice tailwind for UK stocks.

It isn’t really worth recapping how the election ended up in the books. Suffice it to say there were debates and votes and attempted amendments that almost derailed the whole thing at the last minute. But in the end, Labour Party leader Jeremy Corbyn determined the three-month Brexit delay more or less took a no-deal Brexit off the table, so he no longer saw a need for his party to block a general election. Hence, with the Conservatives, Labour and some smaller parties in agreement, the motion to dissolve Parliament and hold a contest passed by a wide margin. Lawmakers’ agenda for the next few days will include debates on the inquest into the Grenfell Tower tragedy and the election of a new Speaker to succeed John Bercow, and then, that will be it! Parliament will dissolve on November 6, and the candidates will be off to the races.

From here, expect an overwhelming cacophony of political chatter and noise. Expect big pledges, fights, shouts of “fake news,” quotes taken out of context, grassroots party proposals blown way out of proportion, endless speculation about polling, and a whole lot more. Take it all with many grains of salt.

For instance: The latest polls show the Conservatives 13 to 16 points ahead of Labour, followed by the Liberal Democrats (Lib-Dems) and Brexit Party. The most recent survey, published by Opinium on Saturday, shows the Tories at 40%, Labour at 24%, Lib-Dems at 15% and Brexit Party at 10%.^[i] This is interesting but also rather meaningless for now. For one, wild things can happen during campaigns, and support can shift radically. Look no further than 2017, when former PM Theresa May called a snap election when she had a ginormous lead on Corbyn, only to lose her majority when the votes were in. The same could happen now. Plus, the UK votes by constituency, much like the US House of Representatives. National polls aren’t all that helpful in determining who has an edge in each of the 650 individual races.

Another wrinkle: Brexit is almost certain to be the dividing line. Yes, the Tories and Labour have drafted wide-ranging domestic agendas, which we will discuss more shortly, but Brexit looks set to transcend typical ideological battles. As it stands, Labour appears set to campaign for a second referendum, while the Tories are campaigning on Johnson’s Brexit deal. The Lib-Dems are driving the “Stop Brexit” train and have discussed joining forces with Plaid Cymru (Wales’ nationalist party) and the Scottish National Party (SNP). The Brexit Party, of course, is campaigning on a hard Brexit.

This is where it gets tricky. Will Labour and the Lib-Dems/potential “Stop Brexit” alliance split the vote of people who want to stay in the EU? Will the Brexit Party contest seats the Tories would otherwise have a strong chance of winning, splitting the pro-Brexit/honor-the-referendum vote? We have no clue. These quirks make the outcome even more difficult to gauge. They open the door for either party to win an outright majority. They also create the possibility for another hung Parliament, potentially one even more fragmented than today’s.

So uncertainty remains elevated. It could fall after the election, but it may not. If pro-Brexit parties win a decisive majority, then it seems reasonable to expect Brexit to finally happen on January 31. While we are agnostic on Brexit itself, we think a swift exit and end to uncertainty would probably be the most beneficial outcome for the economy and markets. On the flip side, if Labour wins or forms a coalition with the Lib-Dems, SNP and/or Plaid Cymru, then the possibility of a second referendum looms large—with more uncertainty accompanying it. That may prolong the headwinds that have weighed on UK returns and business investment for several quarters.

Beyond Brexit, one other big concern is flummoxing many investors: the potential for Corbyn, an avowed leftist, to win. In recent days, we have seen an abundance of articles offering advice on Corbyn-proofing a portfolio. Others speculate on which investments will be most hurt by a government many fear will launch a full-frontal assault on property rights. Some of this chatter is based on actual pledges from Labour leadership. Corbyn has proposed nationalizing railways and utilities. His shadow chancellor, John McDonnell, proposed forcing all UK-listed companies to put 10% of their shares in a fund that would distribute dividends to workers and the state. Those are possibilities worth considering. But some of the chatter is far-fetched. For instance, at last month’s Labour Party conference, grassroots members passed a resolution in favor of nationalizing private schools and seizing their property. Headlines had a field day, claiming this was now official Labour policy and so watch out! Only problem is, Labour leadership wasn’t in favor of it. It isn’t official policy. This issue is 100% sociology with little to no market impact, but it is an example of the sort of hype investors will have to cut through.

It will also be crucial to remember markets don’t care about personalities or parties. No party, politician or government is inherently good or bad for stocks. Corbyn isn’t the death of markets any more than Johnson is their savior. Both of the UK’s main parties, at times, have floated proposals that probably benefit the UK economy. Both have also floated proposals that would have harmful side effects. Consider a micro-example: Labour might have first proposed energy price caps, but the Tories passed and implemented them.

We don’t think stocks care much who the next prime minister is. Rather, markets care about policies. The question is: Will the UK’s next government, whoever heads it, have a big enough majority to pass radical change? Corbyn may favor far-left policies, but many in the Parliamentary Labour Party are nowhere near as radical. His internal opponents have kept mum lately to avoid being de-selected as candidates in this election, but if the party returns with a majority, they might feel empowered to water down or block the parts of his agenda they dislike. Just as Conservatives regularly rebelled against May and David Cameron in years prior. If Corbyn wins but doesn’t get much done, that could be a positive surprise for stocks.

This is why we don’t think investors should make knee-jerk reactions to elections or politics in general. Reality is often more complex than headlines make it seem. If UK political drivers take a turn for the worse, investors will have plenty of time to make adjustments. It needn’t happen overnight. So we recommend waiting and seeing.