WeeklyWatch – Parliament prorogued

Monday 02 September 2019

Stock Take

UK divided over prorogation

In 1867, Victorian author Walter Bagehot wrote that it was vital to understand the difference between the dignified or “theatrical” parts of the English constitution and the “efficient parts”, with the monarch and Lords falling under the former, and the Cabinet being seen as an efficient part.

Last week, Boris Johnson took aim at efficiency regarding delivering Brexit, but added a dose of theatrics, too, asking the Queen to prorogue (suspend) Parliament days after MPs return. The action proved divisive – some MPs argued it was about time the government got on with Brexit after three years of parliamentary debate; others saw the prorogation as undignified, arguing Johnson was trying to curtail parliament’s power over Brexit.

The reaction even threatens to achieve the unthinkable – a deal between opposition parties to block a no-deal Brexit. Others are seeking legal action to stop the prorogation, among them a former Conservative Prime Minister. In short, the big hitters are all choosing their weapons and a final battle appears imminent…

Ironically, the public’s opinion tends to align with Brexit preferences. YouGov polling showed that 47% of UK citizens believe the prorogation is unacceptable against 27% who think it is acceptable. Another poll suggested that the prorogation move has not damaged Conservative election prospects – and perhaps especially if any short-term negative impact from a no-deal Brexit is yet to be felt.

Capital Economics said:

“If there is a no-deal Brexit, it seems unlikely that the UK will be able to roll over all the current EU trade deals or quickly sign a new one with the US. The 13 continuity deals signed so far only account for about 8% of UK exports or less than half of the 40 or so free trade agreements the EU has with other countries and trading blocs.”

Lack of interest from global investors

Yet, while Johnson’s announcement did push down the value of sterling, the FTSE 100 was far from animated last week (and UK dividend yields are at their highest in a decade). Global investors, it seems, may be more focused elsewhere.

Chris Ralph, Chief Investment Officer at St. James’s Place, said:

“This is a completely different political situation to anything I’ve experienced in my career, from the daily tweets of Trump to the daily machination of the UK’s exit from the EU. It’s likely sterling will move quite a bit in the weeks ahead but there’s so much political uncertainty in the UK that many foreign investors see it as almost un-investable – and markets have been much more driven by US-China negotiations, events in the Middle East and even developments in Italy.”

US stocks enjoy a strong week

Indeed, last week was a good one for US stocks – the latest Deutsche Bank analysis of US Treasury data showed that foreign investors are piling into US stocks and bonds at their fastest pace in around a year. The S&P 500 had a particularly strong week, buoyed by softening trade war rhetoric from both Donald Trump and a senior official in Beijing.

That said, US GDP for the second quarter was revised down to 2.0% and, while data released last week showed consumer spending and corporate profits rising, economists’ projections showed growth slowing further in the current quarter. Business investment in the US has fallen for the first time since 2016.

Increase in recession expectations

A Wall Street Journal poll found that economists’ 12-month US recession expectations are at their highest level since 2011. Absolute Strategy Research (ASR), an economics house, is among those predicting a contraction, saying: “We now believe that the US is likely to fall into recession next year. A more aggressive policy response may arrive, but it will probably come too late – and we doubt the rest of the world will be able to shrug off a US recession.”

Markets now expect the Federal Reserve to take interest rates below 1% by 2021, but the Fed’s capacity to make significant interventions is limited by the fact that rates are already low. The US president has been vocal in calling on the Fed to do more – and to do it quickly; but he is perhaps especially perturbed by the strong dollar (even if plenty of analysis suggests his trade war has only boosted the greenback). Last Monday, the renminbi struck an 11-year low against the dollar. The US has been trying to shift some of its import reliance from China to Vietnam; that goal is only made more difficult by the weak renminbi and strong Vietnamese dong.

Positive week for Europe and Japan

Elsewhere, Europe’s EURO STOXX 50 and Japan’s TOPIX both had good weeks. The rises were largely hitching off the broader global trends, although unemployment in Japan struck a 27-year low and expectations of a less Eurosceptic Italian government aided Italian government bond prices. The latter’s bond challenges now look like a walk in the park compared to those of Argentina, where the President last week announced his plan to extend the maturities on $101 billion of debt.

Wealth Check

Thanks to the recent leadership campaign, we know a reasonable amount about Tory tax ambitions. Perhaps the most eye-catching was the proposal to raise the thresholds for the top rates of Income Tax. Those earning between £50,000 and £80,000 could become basic rate taxpayers, although those same individuals will no longer qualify for higher rate pensions tax relief.

A simpler set of pension rules could also make an appearance, and we could also expect the second set of Inheritance Tax (IHT) proposals made by the Office of Tax Simplification to be seriously considered.

In the event of a Conservative election defeat, it is safe to assume that more radical tax change could be around the corner. The 2017 Labour manifesto proposed higher Income Tax rates and stronger taxes on second properties. The replacement of IHT with a lifetime gifts tax levied on recipients is also likely to be considered – a reminder that the current regime for lifetime gifts may not survive.

The continued uncertainty is not helping people plan for the future. But if you have unused reliefs and allowances and the ability to make full use of them, then now might be a good time to get around to it.

In The Picture

In this video, Phil Woodcock, SJP Head of Division – Investment Communications, reviews recent events on markets and looks ahead to what’s in store. August was a lively month on markets, and politicians continued to play an outsized role.

The Last Word

“I don’t think that [a no-deal Brexit] is where we are going to end up – I think it is a million-to-one against.”

Boris Johnson, 26 June 2019

The information contained is correct as at the date of the article.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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