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29 Jul 19

Ravenscroft weekly update - “Movin' on up”

Source: https://www.rnz.co.nz/news/on-the-inside/307538/boris-johnson%27s-post-brexit-britain

“Movin' on up”

The announcement last week that Boris Johnson had beaten his leadership rival Jeremy Hunt to become leader of the Conservative Party and Prime Minster has come as no surprise to Westminster watchers. Perhaps what has been a surprise was that as Boris was “movin' on up”, numerous ministers were “movin' on out”.

The new Prime Minister has been quick to stamp his authority on his new administration with those ministers not deemed pro-Brexit enough either sacked or effectively pushed out. In total seventeen ministers have been culled. In his first speech on the steps of 10 Downing Street Boris has made it clear that the Irish border backstop should be scrapped and he has threatened to withhold the £39bn set aside for the EU divorce bill should Brussels not offer a better deal. The EU has not responded well to the threats with the odds of a no-deal Brexit increasing markedly ahead of the Halloween deadline. Domestically a wide number of promises have been made with an increase in Government expenditure on the police and infrastructure, and improved transport links in the North of England. So far the rhetoric has gone down well with the British electorate with a “Boris Bounce” reported in various polls carried out on behalf of several Sunday newspapers.

From an investor's perspective Boris Johnson has taken office at a time when UK shares-and in particular many domestically focused businesses-remain firmly out of favour. The reaction in markets has so far been relatively muted as Boris was widely expected to become Prime Minister. Valuations for many UK shares remain depressed against international benchmarks and fund manager surveys continue to flag up the unpopularity of UK assets. This potential valuation opportunity for investors comes at the expense of the conundrum of a wafer-thin Government majority, the possibility of an early general election and a no-deal Brexit. Last week’s takeover bid for Cobham, the British aerospace and defence company is an early test perhaps for the pro-Business credentials of the Government given national security concerns.

One thing which is certainly not “movin' on up” is US interest rates.

The US central bank, the Federal Reserve, meets this week and is on course to deliver a widely anticipated quarter point cut in interest rates. The accompanying policy text will be studied closely by investors seeking “dovish” tones given the expectation built into markets that rates will be cut further. Investors are also assuming that the US economy is decelerating as we move into the second half of the year.

Ending matters on a political theme, last week saw the much anticipated announcement from the US Department of Justice that it will be reviewing the lack of competition in Big Tech. Although the Department of Justice did not name the companies which are likely to find themselves under investigation and increased scrutiny, we can assume it probably includes Google, Amazon and Facebook.

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