Why Britain’s Latest Political Turmoil Isn’t Tumultuous for Stocks

Editors’ Note: MarketMinder does not favor any political party or politician. We assess political developments for their potential economic and market impact only.

It is probably both a great and a terrible week to be UK Prime Minister Boris Johnson. Just this morning, he and wife Carrie welcomed a baby girl, adding a second set of pitter-pattering little feet in 10 Downing Street. Yet the joyous occasion was but a brief respite from a political firestorm. Dozens of Conservative Members of Parliament (MPs) are threatening to revolt over his latest COVID restrictions—which he unveiled amid a furor over revelations that his government didn’t quite follow its own COVID rules during 2020’s holiday party season. Voters are angry, the opposition Labour Party is now polling ahead of Johnson’s Conservatives, rivals are sharpening their knives, and speculation on Johnson’s ouster is running rampant. We won’t wade into that, but we do think gridlock is the likeliest near-term result, keeping the UK’s political backdrop for stocks largely benign as the year closes.

Echoing the trend in most of the developed world, the newest COVID restrictions are less draconian than in the past. For now, there is no lockdown. Instead, the rules include mandatory masking, working from home where possible and vaccine passports for large entertainment venues. People who come into contact with the virus can now test regularly instead of self-isolating. In his press conference announcing the restrictions, Johnson jawboned about a vaccine mandate, but his spokesperson quickly scratched the idea. The restrictions will probably hurt leisure, hospitality and retail in city centers, which will once again lose foot traffic from office workers, but businesses aren’t forced to close for now. So overall, the economic impact appears likely to be quite mild, and UK stocks are (rightly, in our view) taking them in stride.

But people aren’t. Several days ago, UK news outlets started reporting that a holiday party for Johnson’s staff occurred at 10 Downing Street last December, at a time when the country was locked down and normal people weren’t even permitted to visit dying relatives or hold big family gatherings, never mind attend workplace gatherings with wine, cheese and dancing. After the government initially denied the reports, a video leaked showing senior staffers laughing about the party four days after it had allegedly occurred, seemingly confirming the rumors. Thus far, the only political casualty is Johnson’s new press representative, Allegra Stratton, who featured prominently in the leaked video. But considering there are now three (and counting) holiday parties under official investigation, more heads may roll.

Meanwhile, Tory and Labour MPs—along with most of the press corps—are excoriating the apparent hypocrisy, warning no one will follow COVID restrictions if those setting them can’t even be bothered. Westminster insiders estimate the Tory backbench rebellion could exceed the 54 who voted against Johnson on the last round of restrictions. They will probably still pass, as Labour has said it will vote for them, but losing that much of his base would be a huge blow to Johnson’s political capital.

“Partygate,” as pundits have predictably dubbed it, is only the latest thing hitting the government’s popularity. Last month, Johnson got in hot water politically for trying to save Owen Paterson, a senior Tory MP whom Parliament’s ethics watchdog found breached lobbying rules. There is also the ongoing saga of who paid for the redecoration of Johnson’s apartment at Downing Street, which earned the Tories a £17,800 fine for not properly reporting a donation. And then there are the COVID restrictions themselves, which were not going down well with the public even before Partygate. Now all eyes are on next Thursday’s by-election to fill Paterson’s seat, which will be the first real look at how much these events have cost Johnson and his party.

The likelihood this saga triggers a snap election appears low, so we don’t think political uncertainty is suddenly a big risk for UK stocks. If Johnson were to lose a no-confidence motion, the Conservatives’ majority is large enough that they could probably select new leadership and win a fresh confidence vote within the requisite 14 days. Parliament could force a snap election with a two-thirds vote to do so, but the Tories are unlikely to support this, as it would risk losing their commanding majority. If Johnson were to resign or get forced out by senior Tories, as happened to Margaret Thatcher and Theresa May, most observers think Chancellor of the Exchequer Rishi Sunak would be his likely successor, largely extending the status quo policy-wise. Stocks care about policies, not personalities, in our view, so that would probably be a relative non-event for UK stocks.

In the meantime, don’t expect much in the way of non-COVID legislation. The more embattled a government becomes, the more self-interested individual MPs become as they grow worried about losing their seats. This is starting to play out, as Allister Heath detailed in The Telegraph: “With the exception of Northern Ireland, [Johnson] has delivered a clean Brexit, so the Eurosceptics no longer need him. Lockdowners and lockdown-sceptics both feel let down, and are about to become a lot more angry. The Thatcherites are furious at his tax rises, profligacy and failure to deregulate. … The Red Wallers [who won long-time Labour seats in industrial northern cities] are equally unhappy. They realise there is no real ‘levelling up’ strategy^[i] that might work, and are especially terrified at sliding poll ratings that threaten their seats.”^[ii] All of these people have a big incentive not to vote for anything that risks alienating their constituents, which should lead to any major initiatives getting watered down or scrapped outright. Already, the government has ditched the unpopular real estate development proposals that lost it a by-election this past summer. More U-turns won’t surprise.

While voters often have mixed feelings about gridlock, we think stocks love it. Gridlock lowers the risk of big changes to property rights, regulations and redistribution. Whatever anyone’s opinion of these endeavors, they create winners and losers, which often weighs on stocks. When gridlock keeps radical change on these fronts at bay, it reduces uncertainty, which can boost risk-taking and returns. Politics is only one driver, and the UK’s sector, industry and style makeup will likely have a big influence on returns. But if scandal breeds gridlock, we think that points to UK stocks enjoying a fine political backdrop for the foreseeable future.