What Goes Around Comes Around
Oliver Blackbourn, Portfolio Manager on the UK-based Multi-Asset Team, looks at the potential implications of the resignation of UK Prime Minister Theresa May.
- UK Prime Minister Theresa May tendered her resignation on Friday.
- A new figurehead is likely to bring new energy to the stalled Brexit process, but they will face the same obstacles that PM May has encountered.
- Despite the turmoil, we feel that UK stocks remain attractive due to a high dividend yield and defensive characteristics in a late-cycle environment.
Prime Minister Theresa May’s resignation today was widely anticipated as her authority, which had been ebbing away, suffered a fatal blow in her attempt to garner Labour Party support for another vote on the European Union (EU) Withdrawal Agreement. A Conservative Party leadership contest had already effectively started and it is expected that a pro-Leave candidate will prevail. A new figurehead is likely to bring new energy to a process that has completely stalled, but they will face the same obstacles that PM May has encountered.
The EU has set out its conditions and can only offer a limited amount of flexibility as it faces its own internal challenges. At the same time, a change in leader does not change the arithmetic in the UK Parliament. In the series of indicative votes, members of Parliament (MPs) failed to find agreement on any of the proposals and the new Tory leader will likely move toward a “harder” exit stance given the threats from the new Brexit Party. It may require the reshuffle of a general election to break the deadlock – an event that is increasingly likely as the two main political parties remain deeply divided over Brexit.
Therefore, we believe that uncertainty will continue to reign and that growth will be hampered by the lack of willingness from companies to make investment. Furthermore, we expect any bounce in sterling is likely to be temporary because optimism will quickly fade as unchanging reality sets in. Gilt yields are also likely to remain subdued against such a backdrop. In our view, UK equities may benefit from a weaker currency, but the threat of a change in terms of trade will hang over them. However, we feel that UK stocks remain attractive due to a high dividend yield and defensive characteristics in a late-cycle environment.