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UK: New Prime Minister, But Old Problems Still Loom Large

Jeffrey Sacks

By Jeffrey Sacks

Head - EMEA Investment Strategy

July 25, 2019Posted InEquities, Fixed Income and Investment Strategy

  • New UK Prime Minister. Boris Johnson takes over from Theresa May today as UK PM.
  • Strong party mandate. With two-thirds of Conservative members backing him over rival Jeremy Hunt, Mr Johnson has a convincing mandate from his party for personnel changes and a new approach to Brexit. 
  • Weak parliamentary hand. The new PM inherits a parliamentary working majority of only two MPs.
  • Little room for manoeuvre. The UK parliament is opposed to leaving the European Union EU on 31 October without a deal. 
  • Successful Brexit deal renegotiation challenging. We see a high probability that the new PM won't reach agreement with the EU to reset the terms of an orderly Brexit. 
  • Autumn general election risk. If the EU cannot be successfully renegotiated and the UK parliament blocks leaving without a deal, a UK general election becomes likely. 
  • Electoral uncertainty. Given the polarization and fragmentation over Brexit, the result of any election could hinge on whether PM Johnson can secure support from the hardline anti-EU Brexit Party. 
  • Economy weakening. Cyclical pressures could be exacerbated by a 'no-deal exit' and by weakening confidence due to ongoing domestic political uncertainty. 
  • Stay cautious for now. The risks of a 'no deal' Brexit and of a Labour-led coalition winning a UK general election are likely to restrain UK assets this summer. We also highlight three developments that could lead to early upside surprise. 
    • Selective short-term opportunities only. While UK currency and equities are expensive, reflecting political uncertainty, we see only selective equity opportunities for the moment. 
    • Wait until the outlook becomes clearer. We think the UK leaving the EU with a deal would be very positive for UK assets. Such an outcome would likely also keep the business-friendly Conservative Party in government. A 'no deal' exit followed by a Conservative-led coalition would be initially negative due to the economic impact, then recovery. The worst-case for UK assets would be a 'no-deal exit' followed by a Labour-led coalition. 

Click here to read European Strategy Bulletin.