đź”’ How to make money after UK elections? Bet on Tory win, says Donwald Pressly

Donwald Pressly is a respected South African political journalist. He has turned his sharp eye to British politics, with a general election set for December 12. The UK media have painted the national elections as a two-party race between Boris Johnson’s Conservatives and Jeremy Corbyn’s Labour Party; ditto betting companies. Pressly’s digging around finds backing for this view from polls, though in recent years polls have become less reliable. He has also interviewed economics experts for their ideas on which asset classes will benefit from a widely expected Tory victory. Pressly’s got his eye on the British property market, which seems set to perform in the long run. In the shorter term, it could be a bargain-hunting opportunity for those who favour stocks. – Jackie Cameron 

By Donwald Pressly*

What does a large Tory government mean for South Africa’s investors in the UK? Donwald Pressly, a student of the political economy does some digging about whether one should be buying up pounds, UK equities or other investment vehicles. 
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Donwald Pressly

When the Brexit Election was announced in October, the polls were already showing that the Conservative Party under Boris Johnson would sweep to an overall majority in the house of Commons. Since then the Brexit party has announced it would pull back about 300 candidates in Tory-strong areas – so as not to split the Brexit vote – and now the former London Mayor looks set to stampede to a majority in excess of 30 seats of the 650 seat house of Commons on December 12. The Tories need just 326 seats to win an overall majority, but the polls suggest this will easily be exceeded. But there is still two weeks to go. 

One can predict with a measure of certainty that Boris Johnson will return the Conservative Party in power. One can also stick one’s neck out that it will be an overall majority in the Commons. Electoralcalculus is a most reputable website. At the start of the general election campaign it predicted that Boris would likely get about a 76 seat majority. Now it gives the Tories a more conservative 34 seat majority. If that occurs, that will provide a political – read parliamentary – stability for Britain.

The Tories have battled to win votes in the Commons for some time – generally being outvoted by 20 votes or so by the opposition (and some Tory MPs too from time to time). After this Christmas election this picture looks set to change radically. The YouGov poll released this week gives the Tories a margin of victory  of 359 seats (up 42 from 2017). That would give the combined opposition 291 and the Tories a whopping 68 seat majority, Labour would win 211 (down by 51), the Scottish National Party – anti Brexit – 43 (up eight) and the Liberal Democrats 13 (a gain of one) – also Remainers. Significantly both these major polls show that the Brexit Party will not win a single seat. YouGov predicts Plaid Cymru would retain its four seats and the Greens its one seat.

If these sort of figures pan out on December 12, a Tory government– with a strong mandate to carry out Brexit, the UK’s withdrawal from the European Union – can then shift focus away from battling to stay in office to the type of deal that is garnered. Years of uncertainty over the whether or not to do the Brexit deal will come to an end. The process will then start to reconfigure trade deals and all its attendant and complex regulations with Britain’s trading partners, not least of all the EU.

Economists.co.za director Mike Schussler says the financial markets have already factored in a Tory win and the move forward to Brexit. Thus one could see the pound slipping slightly, but most of the adjustments to the pound, he believes, have already been made. The pound took a pounding, so to speak, after Brexit in 2015. Schussler believes that the pound will weaken for a spell, so it is probably a good time to start buying pounds after December 12, after election day. But he doesn’t believe that the weakening will be anything dramatic. Where there could be dramatic changes is in the real economy, which involves trade, tariffs and such things which affect the consumer in the UK and elsewhere directly. So should one buy British equities? I ask. Should one buy property in the UK? Schussler says it could take three years for the real economy to settle down – read recover.

I persist with my line of questioning. But shouldn’t one buy up property given that some of the international banks and financial services companies are moving out of London? Well he says there is likely to be a weakening in the UK property market – particularly retail and warehousing. So that means to this author that it will be – and perhaps already is – a good time to get that housing equity slice or the right time to buy space or a flat in London.

As for equities, Schussler advises that it depends on the industry concerned. Big companies like Investec and Anglo American with strong SA connections have a world-wide footprint, so these are unlikely to be ravaged by the expected real economy weakening ahead in the UK. But if you are selling citrus – particularly the black-spotted kind which will no longer face bans – or wine to the United Kingdom from SA, there may be “a gap” to snatch in the market, suggests Schussler.

Political stability, however, is good in the long term. A five year term of Tory rule will be good for that economy. It looks like Labour will be doing pretty badly on December 12, losing dozens of seats. The Liberal Democrats look likely increase their seats from a small base, but as the Tories will hold an overall majority, their Stop Brexit position, will have little impact. Its call for a second referendum will be dead in the water. Even the more conservative prediction of a Labour loss of 262 to 225 will be dramatic.

YouGov suggests Labour will go down to 211, a drop of 51 seats since the 2017 general election. Electoralcalculus.com polls suggest that Labour – which has appeared to have prevaricated on Brexit – is likely to be slaughtered in the election, particularly on the western and northern Eastern areas of England, Scotland and in Wales. While the SNP appears to be gaining ground strongly – winning 43 (against 35 seats in 2017 – the other Remain party, the Liberal Democrats is not polling exceptionally well.

It is worth looking at Electoralcalculus.com’s map where it breaks down all 650 seats giving predicted results and possible seat changes. There appear to be a flood of seats which are set to fall to the Tories, mainly from Labour . In the north west of England, there look set to be five Tory upset victories, including Blackpool South and the industrial town of Barrow on Furness. In Wales the Tories are expected to pick up Wrexham from Labour. In the South East the Tories are expected to snatch back Canterbury – the seat of the Anglican church – from Labour. In Anglia, the Liberal Democrats are expected to pick up Cambridge from Labour. The Conservatives are set to win Bedford, Peterborough and Ipswich from Labour. The Tories are expected to pick up six seats in the West Midlands.

In Scotland,  the Tories are expected to lose one seat and retain 12, Labour is set to lose six, the Liberals are set to gain one (to five) while the biggest winner will be the SNP going up to 41 seats from 35 in 2017. The SNP is set to gain all these seats from Labour. The LibDems are expected to snatch Fife North East from the SNP and the SNP is expected to snatch Stirling from the Tories. In London, In London, the Liberal Democrats are expected to achieve two upsets – Bermondsey and Old Southwark (from Labour) and and Richmond Park (from the Tories) – while Boris himself is expected to easily retain Uxbridge and south Ruislip. At Dagenham and Rainham, the Tories are expected to achieve an upset against Labour. The overall national picture is that the Tories and the SNP will be gaining much ground in 2019.

Dennis Dykes, Nedbank group chief economist, agrees with Schussler. The markets have already priced in Brexit. He agrees that a win for Boris would imply that Brexit would go ahead and that it is now “a fait accompli”. He believes that the rand-pound relationship after a big Boris victory would see an improvement of the rand against sterling initially. “The markets would focus on uncertainty,” he said. The pound is likely to start improving as a clearer picture of the Brexit deal emerges, but this may take some time. Schussler also believes the pound would start to strengthen in the longer run.

With regard to the bigger picture, Dykes argued that it was unclear exactly how the financial markets – or the real economy involving trade and tariffs – would adapt in a positive direction. But there was likely to be a drop off in trade with the European Union.

“What happens over the longer term… is bad for the United Kingdom and bad for the global economy,” said Dykes, pointing to the process of countries like Britain becoming more insular. As far as trade between South Africa – and other Commonwealth countries – is concerned, he does not foresee that there will be a huge detrimental impact. Pressed on whether, in fact, the expected downturn in UK-EU trade, may in fact have a big benefit for South Africa, he said there was this possibility “of some benefit”.

Wealthy South Africans may be able to take advantage of a weaker equities market or a bearish property market in the UK, but the downturn may in fact be more prolonged than some expect. He conceded that many South Africans may “see a crack” in the British market “but it is always difficult (to predict) with markets”. It was still likely that the expected downturn in the global economy could well be “prolonged”. He pointed out that while the pullback from London as a banking and financial services centre had been less acute than many had predicted, there could still be a long term negative impact of Brexit on this sector. Dykes conceded that despite the noise over Brexit – which could last quite a long time – South Africans remained “comfortable in the UK environment. From that perspective could see some improvement (of SA investment there)”.

So where does that leave the SA investor in Britain? There is probably an opportunity to benefit from the weakened pound after the election, especially with the economists’ prediction that the pound will start to strengthen only once there is clarity over the terms of Brexit deal. When exactly that will transpire is anyone’s guess. With property and equities, it will depend how badly Britain is affected by a Brexit meltdown. But investors in UK-based property or equities are likely to see good returns in the longer term and the uncertainty ahead may provide a buyers’ market for South Africans in the medium term.

  • Donwald Pressly is a political economy analyst. He normally focuses his attention on matters South African but the Brexit Election has captured his interest.