“I have only recently and reluctantly come to this conclusion.” So claimed the United Kingdom’s prime minister, Theresa May, as she announced a snap general election for 8th June. The British are entitled to feel a certain fatigue when it comes to important votes in recent years. There have been many. But this one has implications that are far greater than a typical general election.
First the bad news…at least for long suffering British voters. They’ve got to suffer more campaigning and go to the polls yet again. There was a Scottish independence referendum in 2014, a General Election in 2015, the EU referendum in 2016…and now this.
Now the good news. Assuming Theresa May gets the necessary two thirds of votes from members of parliament (MPs) needed to call an early election, the whole thing will take only 50 days. For countries with more long-winded processes, please take note (you know who you are…)
Despite a short term drop in British stocks, this turn of events could in fact be good news in the longer run. But more on that later. Back to what’s going on right now…
Mrs. May took some flack in recent days. While tensions were mounting over Syria and North Korea she chose to go on a walking holiday in Wales. It’s now clear that she had other things on her mind – namely taking the risk of launching an election bid.
She got the top political job in Britain on 13th July 2016 after her predecessor, David Cameron, stepped down. That followed his loss of the June referendum on whether the UK should stay in the European Union. Cameron’s departure triggered a leadership contest for the governing Conservative Party (also known as the “Tories”).
Mrs. May either had the sharpest knife or the best armoured back, or perhaps both. Tory leadership contests are pretty brutal affairs. But, either way, she emerged as the only candidate left standing, from an initial field of five.
This created a strange situation. The new leader of the country had campaigned to stay in the EU Empire, but was now in charge of leading her country’s exit from it. At the same time the British people hadn’t chosen her party to govern while she was the Tory leader. And the whole country was, and remains, deeply divided over the whole “Brexit” issue.
On top of that a great deal of the political (and media) establishment is anti-Brexit, at least at heart if not in public. What’s more, May’s government has a slim working majority in the House of Commons of just 17 seats, out of a total of 650 seats.
This leaves her government lacking authority over her own party and the country. In turn that puts the Brexit process in a precarious state. After all, the two year process to leave the EU officially started in March this year. Without strong leadership there’s a big risk that the UK government won’t be able to negotiate the best possible deal for the country.
At this point the main concern of British people shouldn’t be whether they voted to leave the EU or to remain in it. What matters now is making the best of the current situation. Having a strong government will make a better outcome more likely.
Why risk an election right now?
So far, so logical. But what makes May think that having the election is worth the risk? It’s because her Conservative party has a massive lead in the polls in relation to the main party of the left, the Labour party. Two recent opinion polls put the Conservatives at 44% or 46% of voting intentions and Labour at 23% or 25%.
Obviously that’s still a minority of voting intentions for the Tories. But the UK has an electoral system known as “first past the post”. It means that large minority parties regularly get big majorities in parliament, and small minority parties usually get hardly anything.
The way it works is that whichever candidate gets the biggest vote in each voting district, known as a “constituency”, is the winner. It doesn’t matter if they don’t get a majority, they become the member of parliament (MP). It also means a party can have plenty of support across the country, say 15%, but win absolutely no seats.
Next, the political party with the most winning candidates gets to form a government. If that party doesn’t have a majority of seats it can form a coalition, as happened between the Conservatives and Liberal Democrats in 2010.
If that system seems strange or unfair it doesn’t matter. There was a referendum in 2011 asking the people if they wanted to change it to a form of “proportional representation”. The option offered was something called the “alternative vote” (AV), where voters can choose more than one candidate in order of preference. But the change was soundly rejected by 68% to 32%, so the country continues with the old system.
The point of all this is that May’s Conservative party is predicted to win a substantially larger majority of seats than it has now. Three predictions I’ve come across today give the Conservatives 381 seats, 395 seats or even 400 seats. That’s a gain of between 51 and 70 seats – mostly taken from the Labour party – and giving an overall total that’s 58.6% to 61.5% of total 650 seats.
It would also leave May with a majority similar to Conservative Margaret Thatcher at the peak of her powers, although still slightly short of Tony Blair’s “New Labour” in its prime (it’s amazing these days to think that he was once highly popular…). Thatcher won 61.1% of the seats in 1983 and Blair managed 63.4% in 1997.
Whatever actually happens – and we know we have to be cautious about poll predictions – it looks highly likely that May will win a substantially bigger majority. Bookmaker Ladbrokes gives odds of 1-to-10 that she’ll win the most seats of any party and 1-to-5 of getting an outright majority.
A bigger majority will leave May with a much stronger hand to play in the Brexit negotiations. She won’t have to worry so much about a few rebel MPs in her own party going against her. And she’ll have a clear mandate to negotiate with Brussels as she sees fit, making it easier to stand her ground on key issues.
Also, in the event that no reasonable Brexit deal can be reached, it would make it easier to simply walk away. Then the UK would have to trade with the EU under World Trade Organisation (WTO) rules, which isn’t the best outcome. But in that event the Tories have already hinted that, to compensate, they’d turn Britain into a giant corporate tax haven right on the doorstep of the EU.
In the short run, markets reacted to the surprise announcement with the pound sterling up 1.6% against the US dollar. That’s a huge one day move for a major currency. At the same time the FTSE 100 index of UK stocks was down 2.5%, led by international commodity producers (mining, oil and gas).
Those companies make a lot of their money in foreign currencies, so it makes sense for their shares to fall as the pound rises. They were down 4-6% in pound terms.
Obviously a stronger pound isn’t good for British exporters either. But a stronger government – from the traditionally more business friendly side of the political aisle – removes uncertainty. It will end up being good for the economy, at least compared with the very poor alternative. Namely a currently hard left, high spending, anti-business Labour party…or an alliance between Labour and the equally hard left Scottish National Party.
We don’t know exactly what’s going to happen. But it looks likely that the UK will end up with a stronger government at a hugely important time in the country’s history. Whatever happens…mercifully…it will all be over in under eight weeks.
Assuming Theresa May’s Conservative party does well on 8th June, and with some of the Brexit uncertainty out of the way, it could be time to take a closer look at British stocks. This latest development is something that’s well worth keeping a close eye on.
Stay tuned OfWealthers,
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