U.K. Plc Cheers Johnson Election Win, But Brexit Still Looms
U.K. Plc breathed a sigh of relief after Boris Johnson’s lopsided election victory, cheered by his pro-enterprise agenda and an end to the political paralysis that had left Britain’s relationship with the European Union in limbo.
Johnson’s win laid to rest concerns about Labour leader Jeremy Corbyn’s radical plans to nationalize swathes of British industry and impose onerous rules on business, such as handing workers as much as 10% ownership in companies.
The pound and stocks soared amid optimism the result would unlock renewed investment in the U.K. British billionaire John Caudwell, for one, said he’d been hesitant to make investments before the election, but would now do so.
“Now I can go full steam ahead with them, knowing we’ve got a stable economic platform,” Caudwell said in an interview Friday. The 67-year-old had warned a Labour government could prompt him to leave the country. “I will invest more in Great Britain. I will be creating more jobs.”
Still, for many companies Brexit remains a worry, and executives urged Johnson to take his time and strike a business-friendly deal with the EU. His Conservative majority, set to be the largest since Margaret Thatcher’s in 1987, should allow him to get his own way on Brexit, especially if he needs extra time to negotiate with the EU.
Paul Myners, a member of the U.K. House of Lords and a former Labour government City minister, said he was disappointed by the result as it meant that Brexit was now “inevitable,” but said the scale of Johnson’s victory should enable him to deliver a less harsh withdrawal. “There is still a huge amount that can be done to ensure that Brexit is not as damaging as it could be,” he said.
Johnson has said he will take Britain out of the EU by Jan. 31, leaving 11 months to hammer out a trade accord with the bloc. If they fail to reach a deal or extend the deadline, Britain could leave the EU at the end of 2020 without a trade agreement to soften the blow, an outcome many businesses dread.
“The Prime Minister must resist the urge for arbitrary negotiating deadlines,” said Jonathan Geldart, director general of the Institute of Directors. “The content and shape of any new deal are much more important than simply the speed in getting there.”
Brexit aside, here’s why Johnson’s win looks like good news for specific parts of the economy:
Finance and the City
Many investors feared that Corbyn’s plans to increase corporate taxes, raise the bank levy and give workers equity ownership would’ve led to capital outflows and damaged the City of London.
Johnson’s parliamentary majority removes that threat, a boost to firms like Lloyds Banking Group Plc and state-controlled Royal Bank of Scotland Group Plc.
“Britain could be set to boom,” said Paul Marshall, co-founder of the Marshall Wace hedge fund, with $43 billion in assets under management. He donated to a group campaigning for Brexit. Johnson’s policy agenda and newfound political stability make the U.K. “a very attractive investment destination,” he said.
Brexit remains a concern, however. Asset managers are likely to keep their contingency plans alive for now, with offices in Luxembourg and Ireland, but there is less pressure to implement them, said Philippe Ferreira, a Paris-based senior cross-asset strategist at Lyxor Asset Management, which oversees 147.4 billion euros ($165 billion).
The prevailing sentiment was an expectation that the new government’s mandate would restore some zip to a financial center that’s largely been in a holding pattern since the U.K. voted to leave the EU in 2016.
“London is getting its glamor back,” said Ali Jamal, founder of wealth-management firm Azura, which focuses on billionaire entrepreneurs.
The Labour Party’s defeat and Corbyn’s decision to stand down before the next election effectively ended the possibility of a broad nationalization of the industry. Under Labour’s plan, utilities like energy company National Grid Plc and water provider Severn Trent Plc had faced the prospect of state ownership.
“The risk of nationalization has been taken off the table for good,” analysts at Sanford C Bernstein Co. said in a note to clients. “We see this as very positive for the U.K. regulated utilities.”
A headline Conservative economic pledge is to borrow an extra 20 billion pounds ($27 billion) a year to spend on capital projects like railways and roads. The increased investment, plus higher general economic confidence, would be a boost for contractors like Balfour Beatty Plc, Costain Group Plc and Keller Group Plc.
A reduction in economic uncertainty from the Conservative victory may boost consumer confidence, a positive for retailers such as Next Plc and Tesco Plc, as shoppers become more confident to spend.
A reduction in Brexit uncertainty under Johnson stands to boost home-builders like Barratt Developments Plc and Bovis Homes Group Plc, plus real estate investment trusts such as Land Securities Group Plc and British Land Co., which have struggled amid the confusion over Britain’s break from the EU.
Johnson is more bullish on military spending than Corbyn, who was a vocal opponent of intervention in the Middle East and had argued for the suspension of arms sales to Saudi Arabia. The Tory win is therefore positive for defense suppliers like BAE Systems Plc, which maintains and supports the kingdom’s Eurofighter jets, and also works on the Dreadnought nuclear deterrent submarine program. That program would’ve been more at risk under Labour.
Labour’s defeat means BT Group Plc’s infrastructure arm, Openreach, won’t be nationalized to deliver free broadband to all, as Corbyn has pledged to do. It should also enable TalkTalk Telecom Group Plc to resume the paused sale of its fiber-optic venture FibreNation, and allow Johnson’s new government to issue a long-delayed verdict on the role China’s Huawei Technologies Ltd will be allowed to play in U.K. telecom infrastructure.
©2019 Bloomberg L.P.