Johnson Resigns: A Look at the Political, Policy and Market Implications
The removal of Prime Minister Boris Johnson will trigger a change in leadership for the Conservative party and the UK. But Johnson’s resignation should have a limited market impact. While his successor will need to pursue a modest fiscal expansion, the composition thereof depends on the leader. Foreign policy is likely to be modestly less confrontational with the EU while hawkish Ukraine policy should remain unchanged.
From here, the first stage of Conservative party politics is selecting the next leader. We have been here before – and not too long ago. The Tory party is quite unusual for its leadership selection process, with the parliamentary grouping voting repeatedly until two favourites remain. From 1995-2016, this was done within 1-3 rounds as there were a limited number of credible heirs. In 2019, it took five rounds to whittle down to 6 candidates. In 2022, we would presume a similar number of rounds as there are multiple party factions.
Next, the final two leaders are then voted upon by the broad party membership, with an electorate not much greater than 100,000 and highly skewed upward by age and income. Any party members with 3 months of membership or longer can vote, so expect membership to jump this week.
When it comes to candidates, ignore the bookies. Their track record for internal party politics is not great (e.g. in 2015, they had Corbyn in 3rd place AFTER polls showed him ahead). The Tory party is split in multiple ways along fiscal, foreign and social policy that it’s not obvious who can cobble together an internal majority. At a parliamentary level, MPs are most concerned about electability with a high share of marginal seats in the North and South – each with an opposite policy conclusion. Given the brand damage done by Johnson to Tories as a ‘competent’ party, we could expect the less charismatic candidates with solid policy competence to emerge as frontrunners. This would favour the likes of Sunak, Mordaunt, Hunt over Zahawi, Truss, Patel, etc.
General elections are likely to be in 2023. May 2024 would be the latest under the original schedule, but the lack of electoral mandate will be particularly stark for the new PM. The 2019 majority was very much ‘pro Boris’ so it will be hard to wait out the full electoral cycle without going back to the people. The outcome is not a foregone conclusion, even if Tories are certain to lose many seats – a majority is still plausible depending on the new PM.
In big picture terms, policy continuity will hold. The coup against Thatcher resulted in another 7 years of Thatcherism, though with a ‘human face.’ On most issues, there is no appetite for revolutionary course change. In fact, there are no big policy proposals at all…so it’s hard to imagine a new PM inventing them prior to the 2024 election.
Within constraints, there will need to be some fiscal impulse. First, the economy will likely be in outright and visible contraction by the time the new PM takes over. Second, the new PM will need to use the first budget to make some type of mark. What’s uncertain is the composition of fiscal impulse, with Sunak tilting toward tax relief that’s growth-dependent or budget-neutral versus other candidates tilting toward debt-financed tax relief. Politically, this will link back to whether party strategists see a greater threat in wealthy Southern England (challenge by the centrist Liberal Democrats) or less affluent Northern England (challenge by Labour).
Foreign policy could see the biggest change with a new PM either needing a confrontation with the EU or the opposite. The odds favour less tensions on Northern Ireland, given that Johnson’s personal predicament was a partial driver of reinvigorating Brexit stress. Euroscepticism is no longer a vote-winner in the broader population when you’re outside the EU and that should hold true for the UK too. On Ukraine, Johnson’s Churchillian instinct of hawkish support for Ukraine is likely to survive regardless of the incoming PM.
Sterling rose an average of +2.6% in the first years of the past 5 Prime Ministers. Slightly greater fiscal expansion in tandem with steeper monetary tightening should support GBP a bit, all else being equal. But ‘all else’ is not very equal these days and the macro dynamics remain perilously bad for sterling, so it will be hard to spot the PM resignation on the GBP chart below in a few weeks’ time.
Ditto for rates and borrowing costs. Change in political leadership is not significant enough to affect fundamentals.
There is a slight chance that UK equities anticipate tax relief, but the policy and politics focus will be on household relief and any corporate tax cut will likely end up being minimal.
USD/GBP: Change of Leadership Not Likely to Have Great Impact
The views expressed in this material are the views of the Policy Research team through the period ending 7 July 2022 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. Past performance is not a reliable indicator of future performance.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
SSGA SPDR ETFS MAY NOT BE AVAILABLE OR SUITABLE FOR YOU. THE VIEWS EXPRESSED/INFORMATION IN THIS SITE DO NOT CONSTITUTE INVESTMENT ADVICE, FINANCIAL, LEGAL, REGULATORY, ACCOUNTING OR TAX ADVICE. INDEPENDENT ADVICE SHOULD BE SOUGHT IN CASES OF DOUBT. NEITHER THE INFORMATION NOR ANY OPINION CONTAINED ON THIS SITE CONSTITUTES A SOLICITATION OR OFFER TO BUY OR SELL SHARES OF THE FUNDS OR ANY OTHER FINANCIAL INSTRUMENT.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
SPDR ETFs may be offered and sold only in those jurisdictions where authorised, in compliance with applicable regulations.
Information related to Mexico
This information does not constitute and is not intended to constitute marketing or an offer of securities and accordingly should not be construed as such. The Funds referenced herein have not been, and will not be, registered under the Mexican Securities Market Law (Ley del Mercado de Valores) and may not be publicly offered or sold in the United Mexican States. Disclosure documentation related to any of the aforementioned Funds may not be distributed publicly in Mexico and shares of the Funds may not be traded in Mexico.
UCITS SPDR ETFs
SPDR ETFs Europe I Plc and SSGA SPDR ETFs Europe II Plc issue SPDR ETFs, and are an open-ended investment company with variable capital having segregated liability between its sub-funds. The Company is organised as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorised as a UCITS by the Central Bank of Ireland.
This website is directed at Qualified Investors only, as defined by Article 10(3) and (3ter) of the Swiss Collective Investment Schemes Act (“CISA”) and its implementing ordinance. Certain funds may not be registered for public distribution with the Swiss Financial Market Supervisory Authority (FINMA), which acts as supervisory authority in investment fund matters, or may not have appointed a Swiss Representative and Paying Agent. For those funds which have appointed a Swiss Representative and Paying Agent, the prospectus, the articles of incorporation, the Key Investor Information Document (KIID) as well as the latest annual and semi-annual reports may be obtained free of charge from the Swiss Representative and Paying Agent, State Street Bank International GmbH, Munich, Zurich Branch, Beethovenstrasse 19, 8027 Zurich, or at www.ssga.com, as well as from the main distributor in Switzerland, State Street Global Advisors AG (“SSGA AG”), Beethovenstrasse 19, 8027 Zurich. For those funds which have not appointed a Swiss Representative and Paying Agent, please observe that the funds are open to Qualified Investors at the exclusion of Qualified Investors with an opting-out pursuant to Art. 5(1) of the Swiss Federal Law on Financial Services ("FinSA") and without any portfolio management or advisory relationship with a financial intermediary pursuant to Article 10(3ter) CISA (“Excluded Qualified Investors”). For further information and fund documents please contact SSGA AG.
You should obtain and read the SPDR prospectus and relevant Key Investor Information Document (KIID) prior to investing, which may be obtained by clicking here. These include further details relating to the SPDR funds, including information relating to costs, risks and where the funds are authorised for sale.
US SPDR ETFs
The distribution of interests of U.S. SPDR ETFs in Switzerland will be exclusively made to, and directed at, Qualified Investors only, as defined by Article 10(3) and (3ter) of the Swiss Collective Investment Schemes Act (“CISA”) and its implementing ordinance. Accordingly, U.S. SPDR ETFs are not registered for public distribution with the Swiss Financial Market Supervisory Authority ("FINMA"). Certain funds may not have appointed a Swiss Representative and Paying Agent. For those funds with a Swiss Representative and Paying Agent, the legal documents of the U.S. SPDR ETFs may be obtained free of charge from the Swiss Representative and Paying Agent, State Street Bank International GmbH, Munich, Zurich Branch, Beethovenstrasse 19, 8027 Zurich, or at www.ssga.com, as well as from the main distributor in Switzerland, State Street Global Advisors AG (“SSGA AG”), Beethovenstrasse 19, 8027 Zurich. For those funds without Swiss Representative and Paying Agent, please observe that the funds are open to Qualified Investors at the exclusion of Qualified Investors with an opting-out pursuant to Art. 5(1) of the Swiss Federal Law on Financial Services ("FinSA") and without any portfolio management or advisory relationship with a financial intermediary pursuant to Article 10(3ter) CISA (“Excluded Qualified Investors”). For further information and fund documents please contact SSGA AG.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus which contains this and other information, download a prospectus here, or talk to your financial advisor. Read it carefully before investing.