Can the election resolve the Brexit impasse and lift markets?

Bryn Jones, manager of the Rathbone Ethical Bond Fund, weighs up how the UK general election might affect markets.

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  1. Bryn Jones

Given seemingly endless months of Brexit impasse, the UK has done exceptionally well to drift along without going backwards. The economy has felt a like a ship becalmed, though, with no wind in evidence from any direction.

Against all odds, Prime Minister Boris Johnson managed to hammer out a Brexit deal with the EU – one essentially reneging on his legacy coalition partner the DUP. That deal’s hefty drag on British household incomes, which according to Kings College economists would be 50% more than his predecessor’s, was lost in the din of his attempt to ram the legislation through the Commons in a matter of days.

But it all turned out to be a feint in the end: Mr Johnson used the kerfuffle as evidence of the country’s need for a new Parliament to solve its deadlock. He managed to outflank his opponents on the public opinion front, getting them to agree to a 12 December election.

Sterling had already risen slightly from the multi-decade lows of mid-year, but it bounded to just shy of $1.30 in October on the new Brexit deal. You would have thought that the overwhelming expectation of a Conservative victory would have sent sterling higher again, but alas…perhaps once-burned investors are waiting for it to be bolted on before they move.

For all the howling noise of the election, the UK still seems like a ship with no wind left in the sails, carried forward by inertia. The nation continues forward into the fog at a so-so pace. Economic growth is ok – not great – and it has been slowing lately, but everyone is praying that the 12 December vote will finally sort the Brexit question once and for all.

What of all the policies that created all the anger that brought about Brexit in the first place? Moody’s has cut the outlook for the UK’s debt rating because of the parties’ spendthrift plans for running the nation. Not exactly a vote of confidence.

And so we float into the election with GDP muted, PMI surveys sedate and inflation benign. To be fair, the most likely force to change any of that in the next month or so is a change in circumstances for the US and/or Europe. Alterations to US monetary policy, fluctuations in global growth and developments (good or bad) are likely to flow through to our own nation’s borrowing costs, currency and economic activity. Not for lack of effort by many, globalisation is still with us.

If the Conservatives manage to win a majority, sterling will probably rise sharply, but the path of inflation, yields and economic expansion will be up to how it negotiates the coming years. Inking Boris Johnson’s deal is only the first step in an extraordinarily long journey, regardless of his cavalier rhetoric. Still, we would be finally setting off, at least. And it would have taken us only three and a half years to set a course.

If Labour gets in, well … the party’s tax-and-spend plans are truly gargantuan. Nationalisation of virtually everything sold off since Margaret Thatcher, large tax hikes on the wealthy, a roll-back for all sorts of tax-based investment and savings incentives. Expect the bottom to fall out of sterling, investors to abandon ship. The chances of an outright Labour victory are extremely slim, and any coalition with the Liberal Democrats is likely to water down these policies enough to make them, while still bitter, at least safe to drink.

Bryn Jones is manager of the Rathbone Ethical Bond Fund.

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