7th August 2019

BoJo’s mojo

Marc Fohr, Head of Investments, and Aykut Efe, economist, discuss the election of Boris Johnson after the resignation of Theresa May.

Marc Fohr: The Conservative party has made its choice: Boris Johnson will become Prime Minister. Some 160.000 members of the party had the opportunity to send in their votes by Monday evening, and 92.153 of them voted for Johnson. His opponent, Foreign Secretary Jeremy Hunt, only received 46.656 votes.  

Aykut Efe: Indeed! BoJo, as he has become known in the press, will now take the reins of the British Conservative party, which will probably mean he takes over at the head of the government. That being said, although he won the election hands down, bringing in 2/3 of the votes, he inherits a Parliament in disarray. In mathematical terms, the Tories (the British Conservative party) and their allies in the DUP (the Northern Ireland nationalist party) have 321 votes in the House of Commons vs. 317 for the opposition parties, including Labour. 320 is the limit for a majority.  

Marc Fohr: Exactly! And Boris Johnson does not seem to have unanimous support within the Conservative party:

Secretary of State for Justice David Gauke and Chancellor of the Exchequer Philip Hammond both clearly stated that they would resign if Johnson were elected as Prime Minister. Don't forget that he will have to succeed where Theresa May failed, which means he has to convince the UK Parliament and rally MPs to his cause. We can expect to see a great deal of lively discussions and negotiations during the summer and autumn not only between the parties, but also within the government and with the European Union. 

Aykut Efe: These will be heated negotiations, given that Boris Johnson is a fervent supporter of a hard Brexit in the event that the United Kingdom and the European Union cannot reach agreement on the terms for the split. He has said so in no uncertain terms: he wants to withdraw from the European Union on 31 October, with or without an agreement. Although this seems at odds with the game of extension after extension played by Theresa May, we believe that BoJo will gain Parliament's trust because despite everything, the Tory MPs will give their vote of confidence to the government as they certainly won't want to run the risk of losing an early general election.  

Marc Fohr: It's true that Boris Johnson has plenty more work to do in an environment where political and economic uncertainties are at the forefront of the scene: the trade war is tearing up the relationship between the US and China, the global economy is slowing down, and in respect to the stockmarket, fundamentals are getting worse! In any event, the financial markets will have to find some breathing space and respond to any statements from either side in the negotiations. As for us, we have decided to keep our distance in terms of stocks, because the current causes for concern are not going away. 

Aykut EfeThis is absolutely the right decision, in fact. In the current environment, the election of Boris Johnson increases the risk of a no-deal Brexit, since he seems to want to quit the Union before the autumn at any cost. That being the case, the economic impacts of a split under the most unfavourable conditions could be hugely significant, with the global economy going through a very challenging phase. This is exactly why we believe that Boris Johnson will reconsider his position: according to the National Institute of Economic and Social Research (NIESR), which is responsible for establishing growth forecasts for the United Kingdom, the country is already in a very delicate situation of economic seizure, and there is a one-in-four chance that the economy has already slipped into a technical recession. A no-deal Brexit would wreak even more havoc and accelerate the economic disruption that has already begun. It will go one of two ways: either Brexit will be achieved in agreement with the European Union, with a deal on the table, and growth forecasts will be in the region of 1% in 2019 and 2020, or there will be no deal, and growth will stagnate during 2019 and 2020, before recovering in 2021. 

Marc Fohr: Absolutely! There is no doubt at all that the atmosphere of political and economic uncertainty will continue. In this environment, therefore, whether the UK leaves the European Union by the front door or the back will depend largely on the negotiation skills of the new Prime Minister.