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"Flextensions" And Elections - Fund Managers React

Jackie Bennion

30 October 2019

Monday began as expected with the European Union granting a Brexit extension until 31 January 2020, or earlier if parliament can ratify a deal. Monday afternoon saw Boris Johnson's call for a snap election to break the logjam fail to win a two-thirds majority. By Monday evening, the government had tabled a one-line bill to amend the Fixed Term Parliaments Act that would allow MPs to back an election with a simple majority, with 12 December as the polling day. The Lib Dems and SNP have said they would support the motion if the PM agrees to put his Brexit deal on hold while the electorate weighs in. Labour with little option on Tuesday joined that chorus. Monday's events have certainly put paid to Johnson's "do or die" Halloween departure, easing hard Brexit fears for now. But negotiating the future trading relationship with a transition period currently due to end on 31 December 2020 ensures that the phantom of Brexit will live on well into next year. Below are comments on the impact of the extension on UK businesses and investment, and the spectre of a pre-Christmas general election.

Edward Park, deputy CIO at Brooks Macdonald
“With the news that the Labour party will back calls for a snap general election, sterling has rallied on the hope that a new parliament will provide more Brexit clarity. Whilst the exact timing of an election remains elusive, it is looking increasingly likely that the UK will be heading to the polls in the first half of December. With the EU confirming a flexible extension of the Article 50 deadline to 31 January 2020, it was becoming politically unpalatable for the opposition to resist Johnson’s calls for an election. The outcome of the election will be heavily predicated on what deal, if any, can be reached between the Labour party and the Liberal Democrats. Should the tentative ‘rebel alliance’ move into a more formal electoral pact, there may be a possibility of an upset against current polling which suggests a Conservative majority.

“Should the government bill pass today, likely amended from 12 December to 9 December or earlier, the risk of a perpetual extension of Article 50 reduces which will provide clarity to sterling be it positive or negative. The sword of Damocles hanging over sterling has as much to do with the constant uncertainty as it has to do with the binary outcomes of no deal or soft Brexit.

"The fundamental change over the last three weeks is Boris Johnson’s government negotiating Withdrawal Agreement B as it makes it highly likely that the Conservatives will campaign on the basis of this deal at the next election. With the major parties offering either the proposed deal or a remain focused mandate, the risk of a no deal secession decreases therefore supporting UK risk assets. Sterling and UK risk assets have been torn between the risks of no deal and a softer Brexit outcome. International asset allocators have shunned UK assets knowing that current prices are incorrect but unsure whether that is because it is too cheap or too expensive. Should parliament return in December with a mandate for Johnson’s deal, sterling will value the reduced no deal threat and continue the rally seen in recent weeks.

“Any rally in sterling will be restrained by the narrow timetable for negotiating the future trading relationship between the UK and the EU with the transition period currently due to end on 31 December 2020. This will ensure that the phantom of Brexit will live on, well into next year.”

Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors
“With more parties joining the government’s position, a UK election before the end of the year looks highly likely. An election could be the much-needed unblocker for the clogged political drain that is Brexit. However, the result needs to be decisive in favour of the pro-leave Conservative Party or the anti-no-deal rainbow of opposition parties. A narrow Tory victory, requiring support from elsewhere to form a workable government, could simply leave us in the same clogged political situation. However, it is also unclear how a coalition of Labour, Liberal Democrats and the Scottish National Party would coalesce around a target Brexit outcome, let alone wider policy objectives.

The latest polls indicate that PM Boris Johnson is benefiting from the progress made with the EU and his clear leave message, despite missing his “dead in a ditch” Halloween deadline. Labour looks likely to be the main loser, its vote share eaten away by both sides of the Brexit spectrum. A lack of clear, desired outcome - beyond blocking no deal - continues to hamper the main opposition party. Having a clear, cohesive leave message simplifies the Tory communication, allowing them to benefit from the division of anti-no-deal votes among multiple opposition parties in the UK’s first-past-the-post electoral system.
The pound continues to be volatile, with the hard-line stance of many in the Tory party creating worries about a potential hard Brexit, beyond the newly-agreed January exit date. Despite the moves in sterling, gilt yields remain around the Bank of England’s base rate of 0.75 per cent. Recent commentary from the Monetary Policy Committee external members has focused on the downside risks to the economy, suggesting a greater likelihood of interest rate cuts. After all, even during a Brexit transition period, continued uncertainty about the UK’s future relationship with the EU is likely to weigh on growth. Better US-China trade headlines and the first signs of a potential global manufacturing stabilisation have sent major sovereign bond yields higher recently. In this environment, gilts look a more attractive, defensive asset over the medium term, relative to other major government bonds.”

Luke Davis, CEO and founder of IW Capital
“Small businesses in the UK are undoubtedly hoping for increased certainty over the Brexit deal and leaving date. Once the deal is confirmed, the sentiment to push on with business will really be able to take off as entrepreneurs and investors look to capitalise on new opportunities that are bound to exist after Brexit. Over the last year or so, we have seen a concerted effort to get on with business, regardless of Brexit and the eventual outcome.

"One thing that we need to ensure is that entrepreneurs and investors looking to start or support a small business are not put off by the turmoil in Parliament. At IW Capital, we have experienced record deal flow and buoyant investor confidence. What Brexit ends up looking like will not affect the fantastic range of innovative, growing SMEs we work with that are likely to drive our private sector forward.”

Azad Zangana, senior European economist and strategist Schroders
"Once an election is confirmed, furious campaigning will follow. According to recent opinion polls, the Conservatives have a healthy lead over the Labour party, and are expected to win the election with a reasonable majority. This could of course change throughout the campaign, as previous prime minister Theresa May discovered in 2017.

The main threat to the government is the Brexit party. Led by Nigel Farage, it wants Brexit to happen as soon as possible, and without a deal. This version of Brexit could attract enough voters to split the support for Brexit and ultimately allow the Labour party to make gains. However, if the government wins a majority as expected, it will be able to push its latest version of the Brexit deal through the legislative procedure with little resistance.

For the economy, a smooth Brexit with a transition period removes a great deal of downside risk for the UK economy. We would expect business investment to rebound with the reduction in uncertainty, while households could also increase spending. The build-up of inventories will have to be worked through, which will be a drag on growth, but this would be complete by the end of 2020. Overall, we could see a gradual acceleration in GDP growth and confidence.

Nigel Green, CEO and founder of deVere Group
“This is a critical stage in the slow-moving, damaging, tortuous Brexit saga. Expect the pound and UK financial assets to be increasingly volatile in the run-up to the general election, given the wide-ranging set of outcomes. The most detrimental of these outcomes for sterling, UK financial assets and the wider British economy, include another hung parliament or a victory for Jeremy Corbyn’s Labour party.

“Boris Johnson’s intention to secure a majority within the House of Commons is by no means guaranteed. The Brexit Party will use the fact that Mr Johnson did not deliver Brexit by 31 October - something on which he staked his whole premiership. The Remain vote could also be split between Labour, the Lib Dems, the Greens and the SNP.

"Political fragmentation on this scale has never happened before in the UK. Therefore, a hung parliament looks like an alarming possibility, meaning there could be no majority to quickly and smoothly resolve the Brexit chaos. Should grinding deadlock continue, the UK economy would still haemorrhage investment and confidence. The fallout of Brexit has cost the UK three and a half years of lost opportunity and many, many tens of billions of pounds. This would only intensify with another hung parliament.

“Meanwhile Jeremy Corbyn’s Labour party will campaign on the most radical, left-wing manifesto in more than a generation. Should he win this election, his anti free-market policies - such as the re-nationalisation of industries from utilities to railways to postal services, and the forcing of companies to give 10 per cent of their shares to staff - plus his high-tax policies, including a possible wealth tax, will spook the financial markets, hit long-term sustainable growth of the British economy, put more pressure on UK financial assets, and lead to a significant sell-off of the pound."

Jenny Tooth OBE, CEO of the UK Business Angels Association
“As negotiations continue to drag on and eat into the transition period, which was put in place to help business prepare for the imminent loss of EU support, we are at risk of running out of time to plan and make changes. Funding for SMEs in the regions has been somewhat forgotten about recently. This will subsequently impact regional SMEs more than larger businesses that can take the hit, or areas such as London or the Golden Triangle which receive the majority of domestic investment.

The potential loss of investment from the continent including the European Regional Development Fund, Horizon 2020 and the Jeremie fund could create a huge investment gap in the UK. This is concerning not only for the loss of EU money, but the risk that Government support for finance to replace this EU funding may take time to have an impact on the ground.”
Tim Graf, head of macro strategy, EMEA at State Street Global Markets
“Today’s widely anticipated Brexit extension formalises the legal basis of delay but is more significant in its shifting focus towards a general election. While the UK does have the option of exiting the EU earlier than the 31 January 2020 deadline, it is more likely the political class will spend this time electioneering, with markets now on poll watch. FX options now imply the highest future uncertainty to be two months from now, in line with the expected timing of a vote. With most polls showing sizable leads, if not yet a clear majority, for the Conservatives, sterling’s recent honeymoon may soon come to an end.”

Helal Miah, investment research analyst at the Share Centre
"The general election is a mixed blessing for investors, partly because it is intertwined with the eventual Brexit outcome. While the polls suggest a Conservative win, which is traditionally good for the UK economy and stock market, the fear is a Conservative/Boris Jonson government could still end up with a no deal scenario after the transition period in just over twelve months if no free trade deal can be arranged, prolonging the uncertainty.

"However, assuming Johnson agrees to avoid a no-deal scenario after the transition period, we see UK-focused companies potentially bouncing back. This would include the UK housebuilder and construction sectors, which have both suffered from a lack of consumer confidence. We see certain engineering companies that have a focus of serving UK businesses bouncing back. Travel and leisure should also see a return of confidence. Confidence in many UK industries will translate across to more demand for investments, therefore increasing demand for loans from the UK big banks, Lloyds, RBS and Barclays.

"A Labour government is traditionally not as business or markets friendly and a Corbyn government will certainly worry the markets. The utility sector will come under more pressure regarding price controls and the possibility of nationalisation without adequate compensation for investors. Corporate greed and executive pay will come under renewed focus as well as more banker bashing.

"Financial institutions will therefore not welcome a Labour government. It has not been speculated yet but we may also see stricter rules and reduced freedoms for gambling companies, thereby limiting their opportunities for profits.

"While a Labour government is traditionally not welcomed by the markets, businesses will have more assurances that a no-deal at the end of 2020 will be avoided and therefore offer more immediate certainties than a Conservative government. There is also a growing perception in the markets that we have been unnecessarily worried over a Conservative hard Brexit and a Labour anti-business government, and that neither of these outcomes will be as adverse as feared."