Boris Johnson, now leader of the Conservative Party enters Downing Street as the leader of a divided country facing a constitutional crisis. He has to date played hard-ball with the EU, with a ‘do or die’ attitude in respect of the 31 October deadline. As that date approaches, given that he now has the job he has always desired, we will see how firm his resolve is.
On the one hand, his rhetoric and Europe’s determination not to abandon the Irish border agreement point towards a ‘No Deal’ exit. On the other, if everything plays out in parliament, a mechanism will be found to prevent a potentially economically damaging Brexit without an agreement.
The only way out of this impasse may be a general election to deliver the PM with a clear ‘No Deal’ mandate. But that would be a dramatic gamble for Mr Johnson. It would force him to risk losing the job he has long craved after a matter of weeks or months. Faced with that prospect, it is possible that we see a new compromising Boris Johnson.
The odds of a No Deal exit are rising but so too is the chance that the ‘can is kicked’ further down the road. Faced with the choice between embarrassment or leaving Downing Street, it may be likely the thick-skinned PM would dig in and seek a further extension.
Whilst this is speculation, for investors, it means continued uncertainty, at least until October and more than likely into next year. That is not great news for investors.
Sterling is likely to take an initial hit. With Boris Johnson heading into Downing Street, the pound has already started to weaken. Fundamentally, sterling looks to have dropped far enough, but sentiment could weaken further if the political crisis intensifies.
The other market in focus will be UK government bonds, (Gilts). This week, these were sold to investors at close to an all-time low yield, which implies high demand. However, the uncertainty is how long investors’ appetite for this asset class will last if Boris Johnson initiates higher fiscal spending (Tax Cuts) to boost a flagging economy.
The property market is already under pressure. Transactions are down from this time last year. Reduction in house prices are likely to spread from London into the rest of the country if Brexit remains unresolved.
With regards to Equities (the Stock Market), the FTSE 100 index is full of exporters and overseas earners. Therefore, the benefits of a weak exchange rate (Sterling) enables foreign profits and dividends from shares worth more, which is somewhat a ‘silver lining’ to a weak pound.
As always, we would encourage investors not to over-react. Share prices will fall and rise and it’s important not to be ‘out of the market’ at the wrong time as this can be costly to your overall capital values. We believe investors should remain focused on the medium to long term, investing over ‘time’, rather than trying to ‘time the market’. We will continue to work with you and manage your financial plan and provide the best potential to mitigate volatility by diversifying investments suitably across a broad range of asset classes that include equities, commercial property funds, fixed interest securities (bonds) and cash. We will always look to tailor your assets to your attitude to risk and capacity for loss, whilst considering what the impact the current stage in the economic cycle has on your exposure to various assets.
For clarification of any points discussed above and any future independent advice regarding your own financial planning, please do contact us on 01626 833225 or email [email protected]
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