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.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.