Brexit

Boris Bargain, anyone?

13 Aug 2019

Ahmer Tirmizi, Investment Strategist

Brexit is divisive. By extension, Boris Johnson is divisive. The start to his premiership has been divisive. The Telegraph calls it “blistering”. The Guardian prefers the word “reckless”. The truth probably lies somewhere between them.

The cabinet reshuffle saw 18 cabinet ministers sacked*. The press has described it as “ruthless”, a “purge” and a “massacre”. Jacob Rees-Mogg is now in the cabinet as Minister for Grammar Leader of the Commons. The backbench has effectively become the frontbench. Every day the Treasury digs ever further down the back of the sofa to come up with a new policy announcement. It’s curious to see the previously austere government announcing more money for the NHS and the police.

The Brexit front is even more disorientating. As widely reported, the cabinet is the Vote Leave campaign team in all but name. Boris Johnson tells us we will leave the EU on 31 October, “do or die”. To convince the EU he means this, the government has announced a £100m messaging campaign advising of the disruption of a No Deal. But Johnson ascribes to this a “million-to-one” odds of happening. To top it off, a new Brexit countdown clock has been installed at Conservative HQ. Another one is to be installed in the PM’s office – hopefully before 31 October.

Lots of ink has been spilt trying to decipher the meaning of all this: the spending pledges, the campaign team, the tough talk on No Deal. Is another election coming? This seems the only possible conclusion but that could be too hasty.

Brexit fatigue is all he needs

On the one hand, Johnson could try to push through a No Deal. After all, what’s the preparation for? The pound is close to its post-referendum lows, suggesting markets think this outcome is possible. However, Johnson can’t ignore the arithmetic. Parliament has signalled that it does not want a No Deal. He would need to go back to the electorate to change this.

His other option is to try rebranding the withdrawal agreement. It’s not hard to imagine Johnson wanting to step off a plane following 11th hour negotiations, waving a piece of paper in the air and announcing “freedom in our lifetime”. Or a “Boris Bargain”. But again, he can’t ignore the arithmetic. Theresa May’s deal has been rejected three times already. The assumption must be that he will struggle to get a deal through Parliament unless he goes via the voters first.

Or maybe not. Johnson knows that nine out of ten Tory MPs voted for Theresa May’s deal. All he needs is to get the remaining one MP onside. So rather than trying to renegotiate with Brussels, he may be trying to do so with his own party. Relying on Brexit fatigue could just work.

Put another way, Johnson seems to genuinely believe that a negotiator with a bit more gumption can extract more concessions from the EU. It would be hard for him to admit that he couldn’t do better than Theresa May. But the spending pledges, the campaign team and the No Deal preparation could be an attempt to get the remaining MPs to vote for the deal. And to try to avoid an election before October. These actions may be blistering and they may be reckless but they may be Johnson’s only choice.

We expect negotiations to go down to the wire. There will be breakthroughs and setbacks, missed deadlines and last minute reprieves. This could lead to high market uncertainty for the foreseeable future, pulling the pound up and down. The range of possibilities is getting wider which means it’s better to prepare for different outcomes rather than predict any single one. This is why we are overweight the pound as we look to insulate the portfolios from large moves. Because we believe a No Deal will eventually be avoided we are inclined to add to sterling if it continues to weaken.

 

*Source: https://www.theguardian.com/politics/2019/jul/24/cabinet-purged-tories-i-hope-boris-johnson-has-thought-this-through

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