A team of Deutsche Bank macro analysts led by Oliver Harvey has produced its latest note economic note about Brexit expounding on the bank’s near-to-medium-term view on the outlook for British markets.
The bulk of the note is an examination of how the Conservative policy manifesto stacks up against Labour, while also examining how each party’s platform might impact longstanding economic trends in Britannia, including weak productivity (since the crisis, the UK has exhibited the most tepid productivity performance of any major economy, according to the OECD’s data)…
…and a standard of living that hasn’t yet recovered to surpass its pre-crisis peak.
And let’s not forget about taxes. Labour hopes to hike the capital gains tax on investment income, while also raising the inheritance tax and several other levies.
Looking further down the road, DB’s team said they “find it difficult to be bullish sterling until more detail is provided on Brexit outcome.” Strategists are increasingly expressing trepidation about Boris Johnson’s insistence that the Conservatives won’t allow an extension of the next meaningful Brexit deadline (that is, the Dec. 31, 2020 deadline to finish trade-deal talks)
In the near term, the biggest risks are related to the outcome of Thursday’s vote. Conservatives are ahead in the polls, but it’s likely they won’t win an outright majority. So, the first question is what kind of coalition will they form? Two possible iterations are: an alliance with the DUP and/or Brexit Party, or a minority government with the support of the Liberal Democrats. In the event of the former we would be very negative on the pound and bullish UK rates.
Neither route is free of problems for the Tories. The DUP (Democratic Unionist Party) has been a persistent thorn in No. 10’s side since last summer, and both they and the Brexit Party have criticized Johnson’s deal. If they win enough seats, they could try to force Johnson to scrap the deal and push for another round of negotiations, which would probably infuriate both the EU27 and the British public. If the Conservatives end up partnering with the Lib Dems, they might need to commit to a second Brexit referendum in order to pass Johnson’s deal. In the short term, at least, this would present a more optimistic outlook for the pound and UK markets more broadly.
In terms of growth, a Conservative majority followed by implementation of the government’s Brexit deal in January could trigger a bounce in consumer sentiment, in turn lifting growth in the short term. It probably goes without saying, but however the Tories choose to handle the situation, the composition of the governing coalition will be of critical importance to markets.
For example, DB’s team believes business investment would rise if the government (presuming a Tory plurality) agrees to extend the Dec. 2020 deadline, thereby increasing the chances of a lasting trade deal that’s agreeable to both sides.
Polls have consistently shown Conservatives with a sizable lead. But as DB shows, there’s not much of a relationship between the percentage of the vote and number of seats won.
Still, Labour’s program of massive public spending hikes is attractive to the average Joe who is tired of austerity and eager for better broadband access.
Labour’s party manifesto is ambitious, and includes nationalizing the broadband arm of BT Group (formerly British Telecom) to bring free broadband to all of Britain before 2030. The manifesto also calls for much higher regional investment to help smooth out the stark economic inequalities between various regions.
Johnson’s Conservatives are way ahead in the polls. But as investors learned during the Brexit referendum, polls can’t always be trusted.
And anybody who agrees with DB’s long-term skepticism about the pound can probably pick up some OTM puts for a reasonable price.
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