By Cyrique Bourbon, Asset Allocation Strategist at Brown Shipley, a member of KBL European Private Bankers.

Britain’s new prime minister, selected by an overwhelming majority of the country’s governing Conservatives, made few concrete pledges in the weeks leading up to yesterday’s party vote. Just about the only promise Boris Johnson has stuck to is that the UK will leave the European Union on October 31, “come what may, do or die.”

“If we leave the EU system, we will be relieved of a huge amount of unnecessary regulation that is holding this country back,” Johnson has said. “We will be able to set our own priorities, make our own laws and set our own tax policies to suit the needs of this country.”

Given that Parliament will take a six-week holiday starting on Friday, the new prime minister will only have two months to negotiate an exit from the EU – and the slimmest of majorities to support his plan. It’s worth noting that Parliament appears dead set against a so-called “no-deal” Brexit; Johnson himself recently said that the odds of such a scenario were “a million-to-one.”

As the EU has repeatedly stated that it will not renegotiate Theresa May’s withdrawal deal – a proposal that Parliament has already rejected on three occasions – it’s unclear exactly how Johnson intends to successfully lead his country out of Europe.   

Then again, Alexander Boris de Pfeffel Johnson, who was born in New York in 1964 and educated at Oxford, has a history of defying the skeptics. As he himself said in 2004, “My chances of being prime minister are about as good as the chances of finding Elvis on Mars, or my being reincarnated as an olive.”

The great-grandson of a Turkish journalist, Johnson began his career as a Brussels-based, EU-bashing correspondent at the Daily Telegraph. He then became editor of the Spectator, served as a relatively undistinguished two-term mayor of London and, most recently, briefly held the post of UK foreign secretary.

In 2016, before becoming one of the most vocal Leave proponents, Johnson famously wrote two columns setting out an argument for both sides of the EU referendum. Indeed, despite often steep odds and in unlikely circumstances, he has proved to be a survivor.

While more likely to unify his party than his predecessor, one thing that Johnson would almost surely not survive, however, is a general election. Nevertheless, that currently appears to be the most likely scenario, especially if pro-Remain Conservatives decide that bringing down the government is a more palatable option than a no-deal Brexit. In such a scenario, the Labour Party would likely return to power via a coalition and, potentially, call for a second Brexit referendum.

That said, some kind of deal, which would have to include agreement on the Irish border question, appears more likely than no deal at all. Odds-makers currently say that the chances of a no-deal Brexit appear no better than 20% – which is nevertheless the highest they have been since the original June 2016 vote.

All of this means that, despite a new face at 10 Downing Street, the UK will face yet another summer of uncertainty. And that uncertainty will continue to weigh on the country’s economy.

In a report issued on Monday, the UK National Institute of Economic and Social Research warned that growth in Britain has stalled and that there is a 25% chance that it has already fallen into a technical recession. “The outlook beyond October is very murky indeed,” wrote the independent research body, “with the possibility of a severe downturn in the event of a disorderly no-deal Brexit.”

Investors in Europe, especially those worried about the spillover effect, should keep in mind that the UK represents just 2% of global GDP. Although the country accounts for a far more significant 16% of EU GDP and more than one-quarter of the MSCI Europe Index, even a no-deal Brexit would likely have only a minor negative impact on European equities. The impact on European credit markets would also be contained.

It’s worth noting, too, that UK equity markets are highly international, with about 75% of sales and profits generated overseas. Over half of all of that sales exposure is to the US, Asia and emerging markets.

While there is no doubt that a faltering UK economy will not help a stagnant Europe, the main victim of continued Brexit uncertainty will be the UK itself – and, potentially, its newly elected prime minister.


Publié le 23 juillet 2019