The next prime minister?

“As I looked out into the night sky, across all those infinite stars, it made me realize how insignificant they are.” (Peter Cook)

Leadership contest

The field of contestants for the leadership of the Conservative Party (and the UK) continue to jostle on the national stage. Various segments of the electorate, or a miniscule subset of it, are being targeted with promises of tax cuts, restored national pride or admissions of misspent youth. The parliamentary Conservative Party is about to have first dibs at whittling the list of contenders down to something more manageable so that the conservative party membership can have their final say. By the end of July, it is expected that the Conservative Party and the country will have a new leader. We explore what that might mean for investors below.

Does it matter?

Translating campaign trail talk into policy and further into investment action is a perilous game at the best of times. Plans and proposals have to run the gauntlet of parliamentary consensus, civil service implementation and even investor opinion. The latter can be extremely important with regards to major changes of direction, particularly those requiring funding. International investors can be described as all sorts of things on the campaign trail. However, in office, those same investors are part of an often constrictive commercial reality. As we tend to find at the personal level, those lending us money to fuel lavish spending plans without much hoped for return often ask for a higher interest rate to compensate them for the risks of lending to us.

Those candidates promising a ‘clean break’ or ‘hard Brexit’, depending on which way you voted in 2016, may struggle to deliver on their promise. Achieving an exit without a deal is certainly not impossible, but likely trickier than advertised. Admittedly, parliamentary procedure currently offers no legally binding route to block an exit without a deal in the absence of a vote of no confidence in the government. However, the Speaker of the House is the highest authority in the House of Commons and could, in theory, be more flexible in his interpretation of parliamentary convention. Some are speculating that this flexibility could pave the way for MPs to stage a vote – perhaps on an emergency debate, as the current Speaker has hinted in the past – allowing a fresh law to block no deal to be passed.

Who is going to win?

Here, as with all forecasts (especially those political in nature), a hefty dollop of humility is appropriate. Leafing through past conservative leadership contests, the one clear trend that emerges from Harold Macmillan in 1956 through to David Cameron in 2005 is that the favourite very rarely seems to win. Whether that should bias our thoughts here, is open to debate of course. The current thinking is that if Boris Johnson makes it through the parliamentary test, then he is a clear favourite amongst the party faithful. However, much can happen between now and the end of July by when a new leader is scheduled to be installed in No 10.

Investment conclusions

We’ve long talked about the UK economy’s small role in the globally diversified funds and portfolios we run for clients. This Conservative leadership contest is perhaps the most important, the most consequential, that many of us will have seen. Who eventually wins will have an important bearing on the manner of the UK’s exit from the EU, which itself will dictate the economic future of the UK.

However, for investors, the focus should remain on the world economy. The risks of an imminent recession are rising as the front in the US’s trade scrap with China continues to broaden. However, we still maintain that the missing context for the pervasive gloom in parts of the commmentariat, and indeed in the bond market, is the still robust health of US consumers and businesses, which in aggregate represent the most important slice of final demand for global plc. In this context, the risks of an imminent recession are still being exaggerated a little.

For medium term investors, the next recession is an irrelevance. A belief in the continuation of the Fourth Industrial Revolution, from AI to robotics, is all that is required.

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*This article is for information purposes only. It is not intended as an investment advice