Another day, another Prime Minister.

James Penn
August 5, 2019

The headline writers are clearly having a field day at present after the election of Boris Johnson as Leader of the Conservative Party, and by default Prime Minister.

The London Evening Standard recently put it in these terms: ‘BoJo – it’s time for Britain to get its Mojo back.’

The Standard is edited by George Osborne, former Chancellor of the Exchequer, so it looks as if he and Boris have patched up their differences after falling out a few years ago over the Brexit issue.

There have been lots of other entertaining gags, comments and cartoons in the press (and on social media) over the past week. Which is good, because after three years of division over Brexit, on top of the previous seven years of division over austerity, it is time we had a bit of a laugh, and felt better about ourselves.

There is a strong sense of Ground Hog Day to living in the British Isles in recent years – each morning we turn on the radio or television and listen to people talking, or should that be rambling on about the Brexit issue. Interminable discussion, irreconcilable division.

The question is, will even Bojo’s enthusiasm, good humour and bonhomie be sufficient to lift Britain out of the current gloom and uncertainty? Because the Brexit question still looks, and sounds, unsolvable, and it surely has the ability to overcome even Boris’s confidence and seemingly impervious ebullience.
Will Boris be able to thaw the EU? Will he be able to break the Parliamentary logjam?

Many column inches have already been spilt on this matter, and we don’t need to reprise all the arguments again here. Suffice to say that this column would suggest that the No Deal outcome is still relatively unlikely – whether because Boris bottles it, Parliament prevents it, or the EU offers some amendment to the Withdrawal Agreement that allows the Conservatives to sneak it through with a majority.

The probability of No Deal has probably risen from, say, 5% a year ago, to, say, 20% today. That leaves an 80% probability for the alternatives – leaving with a Deal, still perhaps the most likely option (let’s give that a 45% probability), or deferment/Second Referendum/General Election (let’s give that a 35%).

In terms of investments, we enter the third quarter of the year on the back of another good quarter in terms of returns. The second quarter for UK investors was in some ways similar to the third quarter of 2016 (the quarter immediately after the Referendum result), when everything seemed to work in favour of Sterling investors – domestic equities went up, fixed income investments rose in value as yields declined, and the pound fell against other currencies, making the value of overseas investments worth more. Returns last quarter weren’t quite as high as in Q3 2016, but were nevertheless good.

While many Conservatives are currently excited about the Bojo factor, the market is not sharing that excitement. The 10 year government bond yield has been hovering around 0.6%, where it was immediately after the original Referendum result in 2016 – effectively anticipating another ten years ahead of slow growth, low interest rates, and stagnation – while UK ‘domestic’ stocks continue to underperform.

Thus it is fair to say that investment markets may be anticipating that the latest enthusiasm turns, once again, to pessimism.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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