This article was first published in the January 2020 edition of RealDeals.
Politics in 2020 is shaping up to be a very different beast than in 2019. Yes, Brexit is still the talk of Westminster, but we now have a government with a clear agenda, and crucially, a mandate big enough to deliver it.
Johnson’s election campaign strategy was clear – a laser like focus on the need to Get Brexit Done, wrapped in a wider narrative of hope, optimism and aspiration. And it worked. Johnson’s government now has a majority bigger than any other Conservative administration since 1987 and the Labour Party is potentially looking at another decade in the political wilderness.
The Prime Minister’s election campaign was also underpinned by a number of retail policies designed to reach out beyond the Conservative’s traditional voter base – rollout of full fibre and gigabit-capable broadband, further rises in the National Living Wage, 20,000 more police and tougher sentencing of criminals, and targeted support for the British high street. Johnson knows that many traditional Labour voters ‘lent’ him their votes in 2019 and he will be keen to consolidate their support ahead of 2024. Brexit upended traditional party loyalties and the strategy of the Conservative Party election machine (led by a reassembled Vote Leave contingent) of pushing hard into former Labour strongholds in the Midlands and the North of England saw a swathe of constituencies go blue. Johnson will be acutely aware that the only way of shoring up new lower middle-class and blue-collar workers will be by making sure there are tangible improvements in their lives – more money in their pockets, safer communities and more accessible public services.
The market response to the Conservative majority was clear – the FTSE 250 saw its biggest jump in a decade as investors piled into UK stocks and Sterling rose sharply against the Dollar and jumped to a three-and-a-half-year high against the Euro. Shares in politically sensitive markets like water, which faced the threat of nationalisation under a Labour government, saw big gains and banks exposed to the UK economy witnessed their share prices rise sharply once the election result became clear.
So, what does the Johnson government mean for UK investors?
1. Johnson is Getting. Brexit. Done.
The UK will leave the EU on 31 January. We’ll then enter an 11-month transition period during which the UK and the EU will try to thrash out a free trade deal. If a trade deal is successfully agreed, the UK and EU will start trading on those terms immediately after the transition period ends.
If not, the UK faces the prospect of having to trade with no agreement in force, or to agree to a number of stop-gap measures with the EU. While leaving on WTO terms now appears relatively unlikely, the next few months of trade negotiations are likely to be fraught, and it may be that the UK leaves the EU with a relatively bare-bones ‘zero-tariffs, zero-quotas’ deal on goods in place. Investors in cross-border or export-dependent businesses would do well to watch how this develops.
2. The policy and regulatory horizons are clearer.
From a domestic policy perspective, we finally have what investors crave: certainty. The Conservatives have been clear on their domestic policy agenda and on the modernised ‘One Nation’ rationale that underpins their approach to government. With Johnson gearing up for a ten-year stint in No.10, we can expect departments across Whitehall to start gearing up for a period of intense policy-making. Whilst this may mean change in the short-term, a lengthy period of implementation will likely follow, taking some of the guesswork out of business planning.
3. Business is no longer a dirty word.
Contrary to Johnson’s anti business stance back in June, the Conservative Party manifesto also contains a lot that will be comforting to British business. Frequent references to a ‘dynamic free market economy’ set the scene for an unashamedly pro-business agenda.
Notably, the Conservative manifesto makes repeated reference to the ‘symmetry’ at the heart of the UK economy, and the importance of maintaining this balance through the support of British business: “We are the only party that understands the symmetry at the heart of the UK economy. That the only way to fund world-class public services and outstanding infrastructure is to encourage the millions of British businesses that create the wealth of the nation – especially small businesses, family firms and the self-employed.”
A revived recognition of the role of private sector business is already coming from coming from No.10 – promises to ensure regulation is ‘sensible and proportionate,’ a continuation of the ‘spectacularly successful’ Enterprise Investment Schemes, increases in R&D tax credits and a reduction in business rates all signal Johnson’s intentions. More powers to the Competition and Markets authority to tackle rip-offs and bad practices will be the government’s nod towards making sure consumers aren’t forgotten.
4. The age of austerity is over, at least in the North.
Ahead of the anticipated Budget in the Spring, the Treasury is reportedly rewriting the way the government calculates value for money in order to divert additional funds away from London and the South east and towards the North and Midlands. Traditional calculations (on a Gross Value Add basis) have disproportionately focused spending on transport, infrastructure and business development projects in areas with the highest population and business density. Under the new rules, government investment will be directed towards reducing inequality rather than predicated on promoting overall economic growth. Given these changes, we can expect major productivity-enhancing projects outside London to be high on the government’s list for early spending commitments.
However, Johnson’s political honeymoon won’t last long, and he’ll have several critical issues that he’ll need to tackle once he’s back behind his desk in January to demonstrate his government is delivering on its promises. Creating a sustainable social care system, addressing an increasingly complex housing crisis, tackling historically low productivity rates and reversing the public’s disillusionment with the political establishment will be no mean feat, nor are there likely to be any quick fixes. But Boris has spent most of his adult life preparing for this and will want to make sure that his government and eventual legacy is not solely Brexit-shaped – he wants to deliver lasting political change based on an optimistic, aspirational and enterprising new Britain. 2020 will be a year when we see just what Johnson is made of.