I’ve constantly repeated over and over again in the last few months in whatever column or channel I can access that I think the greatest single threat that UK investors face is the rise to power of Corbyn. And I say that as a centre-left leaning social democrat. I have zero sympathy for the current travails of the Conservative Party and I think that we are now accelerating at great speed towards a No Deal Brexit. But as that journey becomes more obvious, we can also begin to trace out a route towards my worst possible UK investor outcome – a Labour government headed by a double act of Marxists.
First off it seems that even we contrarians have to accept that Boris Johnson will get into power unless his personal love life gets in the way (fingers crossed). There are some Tory Remainers who protest to me that Boris is the perfect person to do a deal on Brexit. He can face down the Brexiteer hardliners and force through a version of May’s deal. I now think that argument is tosh. I have not one scintilla of doubt that the ERG would murder Boris if he even considered a sell out like that. Hardliners have already gone on the record as stating that they want to leave, deal or no deal by October 31st. I also think that is the message that Boris will hear as he does the hustings over the next few weeks.
It would be nice of course if the European Union was ready to cut us a deal but I think we all know that we have seen their final negotiating position. Even if Hunt wins, I don’t see them changing their position especially over a backstop proposal that we first suggested.
So on November 1st of this year, we will tumble out of the EU with no deal.
But before then parliament may well ambush PM Johnson – forcing him into a no-confidence vote. Again, a surprising number of Conservative MPs (Remainers this time) have said they’d vote down a Johnson government if it goes for No Deal. I also suspect that the Montgomery bye election will be lost. All in all, that means PM Johnson would lose the confidence vote and as Corbyn couldn’t pull together a coalition in time, we’d be forced to have a general election.
At said General Election the Conservative’s would discover what everyone else already knows. Johnson is NOT popular in the wider country. He is especially not popular in areas the Tories need to win. I can absolutely foresee the Conservative’s winning some Midlands and Northern seats on a hard Brexit platform, especially if a deal can be done with the Brexit Party (though quite what Farage’s more left-wing friends in the MEP block will make of that alliance is anyone’s question). But in this same scenario, I can also see the Conservative Party losing a swathe of seats in the South.
This new general election would be in effect a referendum on Hard Brexit and I have some news for the ERG and the Brexit Party – a majority of the population does not support a hard Brexit. I know more than a few Leavers who are as horrified about a No Deal Brexit as I am. I think those voters will either stay away or vote for the other parties.
A great deal then depends on whether the Brexit Party does do a deal with the Conservative’s. If it doesn’t the right wing vote could splinter badly.
If it does do a deal I think a large segment of left-leaning Brexit voters might still not support the alliance of Conservative’s and Farage.
Either way, we could see a situation where the Conservatives lose big time in the south – and Scotland and Liverpool – while gaining in the Midlands and the North. I think we could end up with a situation where the Conservative’s and Labour both get about 30% of the vote. With a new leader in charge of the Liberal Democrats, we could see their vote go up to about 20% (which isn’t unheard for them in terms of vote share) and the Greens cruise towards 10%. Crucially though the Liberal Democrats will take seats from the Conservative but the Greens won’t take many seats from Labour – if any. That means the Labour Party could end up being the largest party, and thus the first choice to govern.
My sense is that Corbyn and McDonnell will try to patch together an SNP coalition of sorts and then rely on a vote by vote support from the Liberal Democrats. Good luck with either. The ScotsNats are centre left but even they’ll see the risks inherent in a Hard Left Labour government while the Liberal Democrats potential leaders are all basically saying they think Corbyn is a Marxist and can’t be trusted. And they are of course spot on.
But Corbyn and McDonnell will persist and they’ll try and form said minority government. This will ignite the 4am taxi trip to the Bank of England by our new Chancellor as he attempts to bulldoze through, by executive action if necessary, as many of their controversial economic policies as he can get through in a short space of time. They’ll know that their days in government are numbered as the markets take aim at their measures. The ScotNats and LDs will also smell blood and dump Labour at roughly the same time as Labour’s dormant right wing begin to see the writing on the wall.
I recount all this grisly detail because I think this presents us with the worst possible triple whammy imaginable.
- Hard Brexit.
- Labour government pushing through appalling policies.
- Then imminent implosion of said short-lived government as Momentum deselects every last right wing MP in a matter of days.
- The final whammy – not of concern to investors – is that in this scenario the Labour Party would quite literally go up in flames immediately after the debacle and we’d lose the one big party capable of stopping the Conservatives.
But this last point notwithstanding, I think this is an investor’s nightmare scenario. And I’d put the odds of it happening at 50% or more. The road to chaos is now clear and I can’t for the life of me see how it can be avoided. Maybe Boris will pivot. Maybe the Tories will smash the polls and pull of a stunning victory. Maybe Labour will implode before the election. But I think each is unlikely.
The bottom line – start minimizing your UK equity exposure. Winter is coming (quite literally).