UK Prime Minister Theresa May’s exit from the political stage has been long-expected. Now that she is finally resigning this Friday (notwithstanding her potentially awkward final meeting with US President Donald Trump), it would appear that the UK and European Union (EU) see it as highly probable that BoJo (Boris Johnson) will take the leadership reins in Westminster.
The whole Brexit process has echoes of Samuel Beckett’s tragi-comic play ‘Waiting for Godot’, with lots of angst-ridden words but very little movement. From one day to the next, the pattern appears to repeat itself, but with darker undertones, and a growing sense of futility. “Nothing happens. Nobody comes, nobody goes. It’s awful”.
Leadership Contest
Former Foreign Secretary and Brexiteer Boris Johnson is currently the clear favorite to succeed Mrs. May, ahead of a raft of candidates jockeying for position. Indeed, he has been heavily endorsed by Mr. Trump ahead of his State visit to the UK. Johnson is much more popular with the Conservative grass roots membership than with many of his fellow Members of Parliament (MPs), so the biggest obstacle to him becoming the next UK prime minister is ensuring he makes the final two in a probable series of elimination votes by Conservative MPs, from which the party members will choose a new party leader and hence prime minister. Recent history, however, has shown that the front runner for the Conservative crown is often surprisingly defeated. Whatever the outcome, it seems unlikely this time around that a new leader can be put in place without a run-off vote (as happened in 2016), so more precious time will be wasted as the clock ticks down to October 31 – the current deadline set for the UK’s potential departure from the EU.
Meanwhile, as business leaders and investors wearily watch the Theatre of the Absurd in Westminster, the UK economy is likely to remain stuck in the slow lane at best, less able to withstand external shocks such as escalating global trade wars. As of June 4, sterling had weakened by 2.9% against the euro and 3.7% against the US dollar since April 10 – the date on which the UK was granted the extension to October 31, as the prospects of a quick agreed exit from the EU evaporated. Risks of a ‘no-deal’ Brexit (either as a policy choice or by accident) have risen again, and so too has the risk of a general election. Both of these prospects are likely to keep sterling on the back foot.
Decline in Yields
In terms of bond markets, 10-year gilt yields have declined by 0.2% over the same period, but yields on US Treasuries and German bunds have also declined, reflecting fears of an escalation in the trade war between China and the US. Gilts should outperform other UK assets as the saga drags on, but heightened political risks may make them less attractive than other safe-haven government bonds, especially to international investors, given the UK’s currency volatility. Were investors to price in the higher probability of a general election leading to a Labour government, this would be likely to put downward pressure on sterling, but upward and steepening pressure on the gilt curve, as a Labour government looks intent on pursuing significantly higher public spending, more radical economic policies, and the nationalization of key industries.
While the downside for equity investors in utilities in such a scenario seems clear cut, for utility bondholders the potential outcomes appear twofold, depending upon financing structures and the level of any implicit or explicit government support of their debt.
Spoiler alert (and potentially bad news for supporters of a ‘hard’ Brexit): Godot never arrives, and the play ends with the following lines and stage instruction:
Vladimir: “Well? Shall we go?”
Estragon: “Yes, let’s go.”
They do not move.
Authors
Howard Cunningham
Portfolio manager, Fixed Income team
Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.
Important information
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.
