The Week: What does political turmoil mean for UK markets?

It’s been a turbulent few days in British politics. Could there be an impact on UK assets? Or is the turmoil priced in?

  • The Pound has remained largely unmoved by recent events, but remains historically weak
  • Currency traders have grown used to living with uncertainty
  • It is tough to see what might help UK assets reverse direction given the current backdrop

The political situation in the UK is fast-moving and it is difficult to predict whether there will be a functioning government in the short or long term. While the travails of the UK government have little impact for the day-to-day functioning of British companies, the problems can’t entirely be dismissed by investors. 

The first consideration is their impact on sterling. The Pound has remained largely unmoved by recent events against the Dollar and the Euro. This may be because it was already weak on most measures, sent lower by the rapidity of rising rates in the US and consistent poor economic data from the UK. It continues to trade below $1.20, a rarity in recent history, even after the Brexit vote. 

It may also be because currency traders have grown used to living with uncertainty. Since 2016, there has been no period of significant or enduring stability. Questions have persisted about how the UK would leave the EU, then the trade deal that would be put in place, then whether the various issues – such as the Northern Ireland protocol – would be resolved. It may be that the exit of Boris Johnson makes the resolution of some of these issues more rather than less likely. 

Sterling tends to be a cyclical currency, geared to economic growth. With the world increasingly risk averse, the instinct of global investors appears to be to shelter in the Dollar and there remains no compelling reason to buy sterling. In other words, sterling had few friends and Boris Johnson’s turmoil hasn’t changed that situation. 

Equally, it is difficult to suggest that the Prime Minister’s problems could affect the long-term outlook for, say, GlaxoSmithKline, or BP. As such, the UK stock market has seen little impact from his recent political woes. There is a potential scenario where the UK sees a more stable political regime and seeks better relationships with its important trading partners to the benefit of all UK companies that trade internationally, but that feels some way off today.

Should Johnson survive and should his new Chancellor prove sufficiently malleable to reverse planned cuts in corporation tax, the impact on UK assets is likely to be relatively minimal. Few believe these policies can survive cold political reality. Ultimately, the political turmoil is priced in, but it is tough to see what might help UK assets reverse direction given the current backdrop.