Capital markets should put no faith in Johnson

Capital markets enjoyed a euphoric high after Boris Johnson's Conservative Party won a convincing victory in Thursday's general election, bringing what many hoped would be clarity to the long wrangles over Brexit. It lasted two working days. The hardball approach Johnson is taking to EU trade negotiations is a severe letdown, which is likely to make 2020 as unsettling as the last two years.

  • By Sam Kerr
  • 17 Dec 2019
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Financial market participants interested in the UK, across the risk spectrum from foreign exchange and Gilts to equities, were delighted with the 80 seat majority won by Boris Johnson's Conservatives in the UK general election that was fought to decide what would happen about Brexit, once and for all.

The election torpedoed the socialist Labour Party, which had threatened to raise taxes and nationalise a swathe of industries, and thrilled market participants with the prospect at last of obtaining "clarity" on Brexit. That meant the UK's exit was now certain to go ahead on January 31, with a known Withdrawal Agreement that could clearly pass the House of Commons.

The UK would then embark on negotiations with the European Union over their future trading relationship. While no one expected these to be easy, many investors and bankers allowed themselves to hope that a more pragmatic Johnson would emerge, now that he no longer needed to placate the far right wing of the Conservative Party by blustering aggressively against Brussels.

With an unassailable majority, and having got Brexit done, Johnson would be able to tack to the centre and engage in negotiations in a more constructive spirit, using diplomacy to seek the best possible deal for the UK economy. 

Many financial specialists GlobalCapital spoke to on Friday said they thought he was quite likely, in pursuit of this goal, to accept the reality that a valuable trade deal could not be negotiated in 11 months, and therefore to break his manifesto commitment not to extend the transition period, during which the UK will continue to be part of the EU Single Market and Customs Union, beyond the end of 2020. 

This opened up several attractive prospects for UK capital markets, including a re-rating upwards so that UK stocks might lose the discount at which they trade to those in countries such as France and Germany, and a burst of activity from companies that had been putting off making takeovers and raising growth capital.

But Johnson revealed on Monday night that his Christmas gift to investors was a piece of coal. The Withdrawal Agreement will be amended to make it illegal for the UK to extend the transition period. 

Johnson is preparing to handle the EU trade negotiations, not as a pragmatist, but as an opportunist, exploiting the possibilities the talks afford for brinkmanship and playing to the political gallery.

While the FTSE 100 index stayed flat on Tuesday, the domestically focused FTSE 250 fell 1%. Big UK domestic names were largely in the red. Sterling, which skipped more than four cents against the dollar on Thursday night, from $1.307 to $1.349, has lost nearly all its gains, and is back at $1.311.

Some argue that Johnson's move to make the extension illegal is just symbolic. What Parliament legislates, Parliament can later reverse.

But this unforced decision, which Johnson has himself proposed rather than being forced into, once again corners the UK government into a time-limited negotiation with the EU, with a hard cliff-edge at the end. Both sides want to avoid going over the cliff, but they could stumble over it by accident. 

Instead of anything resembling certainty or clarity — market participants' favourite words when reacting to the election last Friday — UK bankers and investors now have to face 12 months of daily headlines on the UK-EU negotiations. Every angry word will be seen as bringing both sides closer to a No Deal catastrophe. 

That is hardly conducive to ordinary capital markets activity, such as raising money for companies.

Bullish investors might convince themselves Johnson’s pledge is a good thing: a way to pressure the EU into some sort of agreement by the end of 2020. However, so far in the Brexit negotiations, a ticking clock has only worked in the EU’s favour, as the UK has far more to lose than the EU.

A different optimistic view is that the real effect, ironically, will be to put Johnson himself under pressure. As the deadline nears, he will have to curb his propensity for empty bombast and agree to a deal, even though this is likely to be far from optimal for the UK.

Johnson of course might abandon his arbitrary end-2020 deadline. He has reneged on promises before — if he hadn't, he would now be "dead in a ditch", rather than having asked for the extension to the October 31 Brexit deadline as opponents told him he would have to.

In the interest of speed, he might also change his negotiating red lines and sign up to closer alignment with the EU. But this looks highly unlikely, since a deep trade deal cannot happen by accident, and Johnson is going to start off by not even asking for one. 

Whatever the result of the coming year of trade talks, investors must be clear-eyed. They cannot take comfort in a belief that Johnson as prime minister will act in their favour, or even in the best interests of the UK.

As his record suggests, he will continue to perform antics for his domestic political audience in the hope of scoring political points, rather than acting as a statesman with the future of his country and its economy at stake.

Capital markets need only look at Johnson's time as prime minister already since July to predict what kind of leader he will be after his election victory. We have seen it all before and there is no better Johnson waiting in the wings.

  • By Sam Kerr
  • 17 Dec 2019

All International Bonds

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 Citi 29.61 88 8.60%
2 JPMorgan 23.76 85 6.90%
3 Barclays 20.64 81 5.99%
4 BofA Securities 19.82 71 5.76%
5 BNP Paribas 16.27 62 4.73%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 60.84 264 7.99%
2 Credit Agricole CIB 47.68 243 6.26%
3 JPMorgan 35.73 111 4.69%
4 SG Corporate & Investment Banking 34.28 171 4.50%
5 UniCredit 33.71 188 4.43%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 Barclays 0.75 7 12.00%
2 Morgan Stanley 0.70 5 11.15%
3 JPMorgan 0.58 5 9.31%
4 Citi 0.48 4 7.75%
5 Goldman Sachs 0.43 3 6.92%