The stock market is often the first to react to major political news, but the heavily anticipated announcement of Boris Johnson as the new Prime Minister was largely priced in.
The FTSE 100 was up 1% by lunchtime at 7,590 points and sterling, after an initial bounce in the run-up to the announcement, slipped back to €1.11 and $1.24, at seven-month lows.
Boris’s victory was seen as a done deal by pundits but the scale of the vote – winning 92,000 votes to Jeremy Hunt’s 46,000 – took some by surprise. Despite that, sterling’s response was muted. For financial markets, we are still no closer to any solution to the Brexit crisis that has kept the the country in paralysis since 2016.
Johnson’s campaign to be Prime Minister was broadly similar to Jeremy Hunt’s: he promised lower taxes, including cuts to income tax and stamp duty, and higher government spending.
Brexit is the main unresolved issue for the incoming Prime Minister and plenty of experts are sceptical that a re-negotiation of the withdrawal deal will be as easy as Johnson makes out.
“Given the low likelihood of a successful re-negotiation, the mostly likely outcome ahead of the Brexit deadline is therefore another delay. Johnson’s ‘do or die’ promise during his campaign simply lacks credibility,” says Azad Zangana, senior European economist at Schroders.
Zangana says that another General Election cannot be ruled out, but “the next Government will probably have to include at least one other major party and may still not be enough to secure a majority for Brexit.” He adds that fiscal loosening after years of austerity is likely to prove less divisive than what to do about Brexit.
Tristan Hanson, multi-asset fund manager at M&G Investments, agrees that the likelihood of another General Election has increased. Looking at Johnson’s stimulus plans for the economy, Hanson says: “Tax cuts and higher fiscal spending is a recipe for continued gains for the stock market but the direction of sterling and Brexit developments will play an equally significant role.”
He adds that global developments such the trade war and the outcome of the US Presidential Election could still be more important factors for the performance of UK assets than Brexit.
Boris Portfolio
How should investors react to the new Prime Minister? Ahead of the news, Morningstar looked at various sectors that could benefit under a Johnson premiership, including telecoms and housing. But Selftrade’s Richard Pearson urges cautions: “Investors should hang tight before building a portfolio full of Boris’ latest ideas. With Brexit hanging over the market, and a possible general election on the cards, it’s likely to be some time before any of these policies come to fruition.”
Colin Dryburgh, co-manager of the Kames Diversified Growth fund, says there are parallels with Donald Trump’s rise to power but believes pound bulls may be disappointed by Boris Johnson: “The US Government is stable and delivering coherent economic policies; a far cry from the mess in the UK which sees Boris as a manifestation rather than a cure.” He notes that, although the US stock market has soared under Trump, the dollar is only up 1% on a trade-weighted basis since his election.
Paul O’Connor, head of the multi-asset team at Janus Henderson Investors, focuses on the anaemic UK economy: “With the economy looking like it is one stumble away from recession, a policy response is needed. A 2019 interest rate cut seems increasingly likely and a Johnson fiscal stimulus a near certainty. While both of these can help cushion the impact of Brexit-related uncertainty on the economy, a full restoration of confidence seems unlikely until the big issue gets resolved.”
Amid all the gloom, could this moment be a turning point for UK assets? “We may well look back in a few years’ time and regard this period as quite simply one of the best opportunities that we have seen to invest in UK equity markets,” says Fidelity International’s Leigh Himsworth.
