Boris resigns – what investors need to think about
Opinion Piece from Kel Nwanuforo
When he won his mammoth 80-seat majority for the Conservatives in 2019, few would have imagined that Boris Johnson would end up serving scarcely any longer as Prime Minister than Gordon Brown or Theresa May. Indeed, it must be particularly cutting to BoJo that he will only rack up about half as much time as PM as his Eton-Oxford ‘frenemy’, David Cameron.
Now it is over all too soon for the boy who dreamed of being ‘world king’.
And for the country, here we are again: a third Conservative leadership contest, a fourth PM, in the space of little over six years. ‘Strong and stable’? A distant memory.
A clear theme has emerged among many of the contenders to replace Mr Johnson: promise tax cuts. Lots of them! And quickly! Yet, so far, less thought appears to have been given to the practicality or wisdom of this platform than to its popularity.
The simple fact – the obvious fact, even – is that putting more money in people’s pockets and in businesses’ bank accounts will add to total demand in the economy. Boosting demand, while supply chains remain strained by Ukraine and the aftershocks of the pandemic, will increase inflation. This is Economics 101.
The bookies’ favourite at the time of writing, Rishi Sunak, has so far been more pragmatic. In the glossy video released to launch his campaign – put together entirely within 48 hours, of course – the former Chancellor warned against “comforting fairy tales” which “leave our children worse off tomorrow.” That seems like a transparent euphemism for “no big tax rises now”.
Many of the contenders have been keen to disclaim Mr Sunak’s hike in National Insurance. Yet one little-discussed aspect of the move is that by reducing the spending power of those on incomes of roughly £34,000 and above, it has the potential to help with our current inflation problem, at least at the margins. It goes without saying that putting it so baldly would not be a vote winner – hence why this has gone unsaid – but it does make sense.
Sir Keir Starmer’s attempts to criticise the Conservative contenders for an “arms race of fantasy economics” were undercut by his own inability to say if a Labour government would cut taxes or not. Sound policies all round then…
Anyway, a new Prime Minister will emerge at the end of the process on 5 September. The long and the short of it is that, should the winning candidate be one of those who have promised large tax cuts, that may cause us to reassess our current positive stance on the UK market. The capacity for a tax giveaway to fuel inflation further, necessitating even more interest rate hikes than are already expected, is clear. We will watch this space keenly.
Separately, you may have noticed that Sterling rose against the dollar when Mr Johnson announced his resignation. Many put this down to a general sense of relief that the chaos which has surrounded the government in recent months was being put to bed at last.
However, it is more likely that this reaction on the markets’ part is related to Mr Johnson’s handling of the Northern Irish Brexit border conundrum. Spoiler alert: they did not like it.
The current plan, being stewarded through Parliament by Foreign Secretary and leadership contender Liz Truss, is to unilaterally abandon parts of the Northern Ireland Protocol agreed with the EU only a few short years ago. Most dispassionate observers are of the view that this course of action would break international law. Global investors are worried that it could eventually lead to a damaging, all-out trade war with the EU.
The candidates’ respective positions on reforming the Northern Ireland Protocol are another area we will be watching closely as the contest progresses. The issue has not featured much on the campaign trail thus far. Yet it is another with enough substantive heft to potentially have an impact on our view on UK assets going forward.
Still, at least until the field thins out further, there is nothing stopping us from reaching for the popcorn and enjoying the show. Who will emerge as victor? The history books do offer one possible clue.
It is interesting to note that big personalities are often replaced with more restrained characters, and vice versa. Think of Winston Churchill giving way to Clement Attlee, Margaret Thatcher to John Major and Theresa May to… well, Boris Johnson.
We will see if the pattern holds this time on the other side of summer…