GC Frontier Markets Weekly: UK Outlook
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GC Frontier Markets Weekly: UK Outlook

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In light of recent government turmoil, GlobalCapital Frontier Markets assesses the investment case for the UK, one of Europe’s more volatile emerging markets.

British premier Theresa May had a difficult week over after two members of her government resigned over her proposed plans to secede from  the European Union.

The two ministers in question expressed displeasure that the plan to secede had largely ignored the illusory objectives laid out in a populist campaign in 2016, which narrowly saw the public vote to leave the supranational block, commonly called “Brexit” by the British media.

The policy of “Brexit” is believed to be deeply harmful to the UK’s economy, according to its own forecasts and remains the reason why we remain underweight on the UK.

Some of the country’s fringe political figures have proposed the idea of another vote, given that many of the promises made during the vote have proven to be false or unworkable.

There has also been mounting evidence that one of the major campaigns behind backing the vote to secede was backed, and perhaps funded, by the Russian government.

But this has been dismissed as ignoring the will of the people and has led to physical threats against politicians who have sought to reverse the outcome of the vote, and accusations of treachery from the secessionist media which backs the hard right wing of the British Conservative Party.

We believe that the resignation of the country’s chief diplomat, the Foreign Secretary Boris Johnson, to be a neutral risk.

It increases the likelihood of Premier May facing a challenge from far right elements of her own political party, but removes a minister who had made a habit of upsetting dignitaries abroad and had recently used expletives to describe the concerns of domestic business leaders.

He expressed dismay in his resignation letter that the UK is unlikely now to ever leave the continent of Europe, a proposal that we feel is geographically unworkable.

There was a small market reaction given that most investors are familiar with Johnson and because he is surprisingly popular with the British public, despite regular gaffs and international incidents. He was previously a high profile mayor and has played off his buffoonish public persona to develop a personal following.

His replacement Jeremy Hunt is a more typical establishment figure, but there could be a negative effect for private health equities in the UK given that he had been previously in charge of the country’s health care and was believed to be in favour of partial privatisation of the state health service.

The other resignation of “Brexit” Generalissimo David Davis, had less of an effect on currency or equity markets due to a lack of name recognition among international portfolio managers.  

Political pressure on the premier, May could also come from the hard left opposition forces, led by the popular Marxist Jeremy Corbyn, who has galvanised much of the country’s youth and has solidified his power through a purging of moderates in the Labour Party.

We see the prospects of a Corbyn government as a negative for UK equities, given his party’s rhetoric on renationalisation of many systemically important sectors of the country’s economy and commitment to a similar secession fro the EU as being proposed by the government.  

But while the opposition has vocally expressed a desire to form a government, they possess fewer seats in the British parliament than May’s party and therefore would be unlikely to pass any consequential reform without another election.

The lack of a majority for either party in parliament means that “Brexit” could be watered down beyond the government's initial proposals and she must present it with an option that can command a majority.

We think there could be upside opportunities for FX investors should "Brexit" be weakened.

While British Sterling has outperformed other EM currencies, such as the Turkish Lira, there is room for growth and it could feasibly move beyond being an instrument used by investors to express a general sense of dismay in the government.

The government is also at risk of attack from some of the secessionist media in the country which had previously supported Premier May. These publications have attacked the country’s judiciary, central bank and now government for betraying the will of the people.

It had previously urged Premier May to consolidate her power under authoritarian rule and to crush "Brexit" saboteurs in ageneral election last year. But May's dismal performance in the vote and pragmatism towards Europe has caused this branch of the media to turn on her.

The risk of a new government in the near-term is fairly unlikely. Despite claims to the contrary, few British political figures have a concrete plan of how to actually see through “Brexit”, or will to take on what is widely seen as a poisoned chalice.

Beyond political risk we see short-term equity gains in the British consumer sector, particularly in restaurant and pub stocks.

This is due to the highly unusual stretch of hot weather and the outperformance of the English football team in the FIFA World Cup, where the team has reached the semi-final.

Should the team be victorious we believe it could also ease short-term pressure on the government, particularly if Premier May declares a national holiday of celebration to follow, as has been called for by much of the country’s media and by Corbyn.

The manager of the national team, Gareth Southgate, has gained cult appeal in England since the start of the summer and Theresa May could seek endorsement from him to boost her popularity, although he could be a dangerous political opponent in the future should he win the World Cup and decide to enter politics.

Disclaimer: GlobalCapital Frontier Markets should under no circumstances be relied on for investment advice.

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