Different prime minister, same problem.
At the time of writing, Theresa May’s successor in number 10 is unknown, yet what is known is that this country’s next leader will face the same daunting task of delivering a brexit policy that garners the support of the House of Commons.
Should the new prime minister be unable to push a revised deal through parliament, or should a ‘No Deal’ departure be rejected, then one route out of the deadlock may be a general election. Brexit uncertainty under a weak Conservative government has dominated investment markets over the past three years, but how would markets react to the possible outcomes of an election?
Typically considered the party of business given its belief in the free market economy, a Conservative majority government would often be well received by investment markets. The problem, however, is that the current environment is far from typical, with political policy more focused on Brexit direction than management of the economy. As such, market reactions will depend on the path of the new prime minister. If they pursue close trading links with the EU, then positive market reactions may be expected. However, should they seek a clean break, then markets are likely to react negatively given concerns over the immediate economic impact.
The market reaction to a Labour majority government can perhaps be more confidently predicted. If Jeremy Corbyn were to become prime minister, and the path of Brexit is not yet set, then it seems that he will seek a customs union, or similar, resulting in a very soft Brexit.
This would likely be well received by markets, yet Mr Corbyn’s hard-left policy agenda could well be viewed less favourably by market participants.
Higher social spending, greater regulation and nationalisation would be funded through higher tax rates and government debt. Pound sterling would likely come under pressure, while both bonds and equities could struggle as a result of higher borrowing costs, brought on by a jump in yields.
Given the rise of smaller parties with clear Brexit policies, a minority Labour or Conservative government propped up by some form of coalition is a real possibility. While exact combinations and policy directions cannot yet be predicted, a broad prediction of a coalition partner acting as a pull to the centre-ground can be made, with perhaps the exception of the Brexit party propping up a Conservative government. But, in other cases, market reactions may be expected to be sanguine relative to the impact caused by full-fat majority governments, with both the potential hard Brexit of a Conservative government or the likely public sector spending spree of a Labour government effectively curtailed.
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