Company / Analytics

Analytics, 09 July 2022

Boris Johnson resigns; Markets mainly unmoved.

Financial markets in the UK have been particularly mum to Boris Johnson’s resignation, with very minor but generally positive movements recorded in the two days since his resignation.

The British pound and UK equities seem to not be bothered much by the UK political drama, seeming to focus more on the global economic factors that are currently in play. These factors include the rampant ongoing inflation and monetary policies that come with it, the ever-rising cost of living, the Ukraine war, and the strong dollar performance. However, small positive movements were recorded in various stocks and the Pound.

Reacting to the news, the pound jumped 0.5% against the dollar, from $1.193 to $1.199 in early trading, as currency dealers reacted positively to rumors coming out of Whitehall.

On the London stock exchange, the FT-SE 100 index of leading British companies rose by about 1% in response to the news.

The gains could be credited to investors who believe Boris’ resigning would be good for markets, as The FTSE 100 and the locally-focused FTSE 250 have both fallen about 8% in dollar terms since the outgoing Prime Minister took office in July 2019, with a bleak economic outlook and political turmoil since Brexit keeping investors away from UK assets.

Market history with Boris in charge

UK equities have been laggards ever since the 2016 Brexit referendum, and they didn’t do any better with Boris Johnson running the country.

The FTSE 100 and the locally-focused FTSE 250 have both fallen about 8% in dollar terms since the outgoing Prime Minister took office in July 2019, with a bleak economic outlook and political turmoil since Brexit keeping investors away from UK assets.

That’s meant significant underperformance against the S&P 500, which is up 29%, and the MSCI All-Country, which has gained 14%, during Johnson’s tenure. Returns for the Euro Stoxx 50 have been similar to the FTSE 100, though the European gauge has substantially outperformed the UK since Brexit – a pillar of Johnson’s political legacy.

UK stocks were laggards in dollar terms during Boris Johnson’s tenure. The pound, meanwhile, hit a two-year low against the dollar this week and only managed a timid bounce after Johnson’s resignation. UK stocks rose on Thursday, along with broader markets.

The FTSE 350 Travel and Leisure Index has dropped 42% since Boris Johnson took office while its continental European equivalent is down 17%. Staff shortages and cost inflation have pummeled the sector in the UK, with Brexit making it harder to hire workers.

The local economy has also not been doing well. UK retailers fell about 3.5% in local currency terms in the roughly three-year period, while global retailers are up 14%. Banks have also suffered, with the UK banks benchmark plummeting 16% during Johnson’s time in office and global banks falling 6%.

Pound reaction

Victoria Scholar, head of investment at interactive investor, said the currency market is relieved Mr. Johnson is resigning, removing some of the political uncertainty that was priced into the pound: “The pound is pushing higher, hitting session highs and inching closer to key psychological territory at $1.20, a critical support level it broke below this week amid the political and economic uncertainty.

“Nonetheless the pound had an extremely difficult first half this year, logging its worst half-year drop since 2016 with expectations for more downside in the second half of the year, particularly given this year’s strong safe haven demand for the dollar.

Kallum Pickering, senior U.K. economist at Berenberg, forecast better days ahead for sterling.

“Judging by the early line-up of potential successors to Johnson, the balance of potential outcomes would tilt towards less strained relations with the EU. Even the ardent Brexiteer candidates are less of the populist variety than Johnson. This suggests that, while it is unclear whether UK-EU relations would improve a bit or a lot, the overall situation stands to be much calmer,” he said in a note.

“Over time, less fraught and uncertain UK-EU relations may prove to be the catalyst for stronger business investment and a sustained appreciation in sterling towards fair value against the dollar and the euro,” he added.

Equity markets reaction

The weak pound and a 75% exposure to overseas revenue, as well as a strong makeup of commodities, have allowed the FTSE 100 to finally outperform this year. The blue chip index has fallen less than 3% in 2022, while global peers are down nearly 20%.

Some still remain negative about what’s ahead for UK markets amid a cost-of-living crisis and monetary tightening by the Bank of England.

There is “zero prospect” of a shift to a softer Brexit, said Evercore ISI analysts Krishna Guha and Peter Williams. UK assets will be “dominated by the threat of entrenched stagflationary dynamics and the associated pressure on the Bank of England to speed up hiking into an unfolding economic slowdown rather than the political change of the guard.”

The FTSE 100 is pushing higher for the second day in a row, rallying from oversold conditions after a sharp sell-off earlier in the week. The political risk is having little impact on UK equities with inflation and recession fears, as well as earnings, the key drivers for equities at this time.

What the future holds

The FTSE 100 has been relatively resilient this year thanks to its favourable sectoral mix of energy stocks and banks which have outperformed in 2022 amid the war in Ukraine and rising UK interest rates which have supported the two sectors respectively.

As often said by economists, markets hate uncertainty, so now that the question about whether or not Boris will resign has been answered, traders will have to deal with the question of who is coming next.

“Getting the economy growing again has got to be the number one focus for all politicians.” Tony Danker, CBI director-general, said on the back of the news. Former chancellor Rishi Sunak, Ben Wallace and Penny Mordaunt have been named as some of the front-runners at the moment, but a clear replacement still remains uncertain.

Coghlan added: “Although a replacement for Boris can be mildly positive for the GBP in the short-term, depending on who it is, the longer-term picture may be different.

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