Bye Bye Bojo

As the Conservative Party spends the summer trying to find a new leader our head of multi-asset investments David Coombs looks at the potential impact on economic strategy.

No 10 door close up

My tenth prime minister has resigned which, to be fair, is a few less than the Queen but nevertheless the numbers are ticking up.

We used to look smugly at Italy, Australia and Japan: how often they chopped and changed their leaders. Now it’s the UK with a revolving door. In my first 40 years only six people had held the keys to Number 10, but the number has accelerated to 11 in the intervening years (including whoever wins the latest Conservative leadership challenge). Has something changed for good? Should we be worried?

Actually, over my lifetime there have been 11 US Presidents, so perhaps 10 isn’t that bad. Still, I believe the recent turnover in British leaders is connected to economic uncertainty. It’s always the economy, stupid.

So, what does Boris’s departure mean? To be honest, not much. I think the markets were never overly enamoured with UK economic policy during his period in charge. The strategy, if there was one, was pretty incoherent.

However, as I note in the latest episode of our The Sharpe End podcast, ‘Feeling the pinch’, I think the identity of his replacement will matter, actually. And it could have a big impact on sentiment over the next few months.

Short-game or long-game?

Due to the way the Conservative Party chooses its leaders, MPs will whittle the wide pack down to two candidates who will then vie for the votes of Conservative members. This is an extremely small electorate (approximately 160,000 with an average age of 57), but with some identifiable preferences.

To get elected by this idiosyncratic cadre, in my opinion, candidates will need to offer lower taxes and more fiscal restraint. The money trees discovered by Boris Johnson and Jeremy Corbyn will need to be dug up. We won’t hear the ‘austerity’ word, but probably Thatcherite phrases like “control of the public purse strings”. We may also see less enthusiasm on the speed to achieve net-zero carbon emissions. So far, most candidates have fallen into the trap of overwhelmingly appealing to the members. This may be smart for getting elected today, but probably not helpful at all for retaining power in 2024.

From an investment point of view, the candidate who has so far struck me as grasping the economic reality is Essex rising star Kemi Badenoch. She is cautious in her approach to fiscal policy, not wanting to be too bold in reducing taxes immediately and focusing on targeted assistance. Her rebuttal to irresponsible one-upmanship on tax cuts is refreshing, but perhaps will rule her out with the party faithful.

There is a case for targeted tax cuts, particularly aimed at lower-income households, given the squeeze on households’ costs. A general tax cut – which is getting bandied about a lot by several contenders – risks simply adding more fuel to an inflationary economy.

Fiscal changes mean monetary changes

In my view, the Bank of England was right to be more cautious than the US Federal Reserve in raising interest rates this year. Given the causes are largely external (spikes in energy, food and logistic costs), the economy is shakier and the government has already been tightening fiscal policy.

Should one of the big-tax-cut-promising candidates win – and acts on the promise – then I would expect the BoE to throw its relative caution to the wind. Interest rates would start rising sharply, supporting the pound and also helping fight inflation, but it would send house prices dipping and likely bake in a recession. (Recession aside, I actually think lower house prices wouldn’t necessarily be a bad thing.)

Of course, the problem is that we won’t know who the top dog will be until 5 September. Given the economic difficulties and spicy uncertainty swirling around, that seems extremely unhelpful and possibly overly indulgent. If you were on the BoE committee, would you hold off, carry on or accelerate your rate hike plans in the meantime? I don’t know what I’d do either. Sterling could be like a bag in the wind this summer.

I know you’re all really here for my political nous, so I’ll give you my sweet inside track: my money is on Penny Mordaunt as PM with Badenoch as First Secretary to the Treasury. Fiscal restraint and modest interest rate rises to be expected, and that might just be enough to slow the turnover at No10. But then my money was on Remain ... 

Tune in to The Sharpe End — a multi-asset investing podcast from Rathbones. You can listen here or wherever you get your podcasts. New episodes monthly.



Important legal information

This area of the site is for professional advisers

Please read this page before proceeding, it explains certain legal and regulatory restrictions applicable to the distribution of this information. It is your responsibility to inform yourselves of and to observe all applicable laws and regulations of the relevant jurisdiction.

This section of the website is directed only at investment advisers and other financial intermediaries who are authorised and regulated by the Financial Conduct Authority (FCA).

The information provided in this site is directed at UK investment advisers only and must not be circulated to private clients or to the general public. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

I confirm that I am an investment intermediary authorised and regulated by the Financial Conduct Authority. I have read and understood the legal information and risk warnings below:

Important Information (Terms and Conditions)

The information contained on this site is believed to be accurate at the date of publication but no warranty of accuracy is given and the information is subject to change without notice. Any opinions or estimates included herein constitute a judgement as of the date of publication and are subject to change without notice. Furthermore, no responsibility is accepted for the accuracy of any information contained within sites provided by third parties that may have links to or from our pages.

Rathbone Investment Management Limited ("RIM") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No 01448919.

In accordance with regulations, all electronic communications and telephone calls between Rathbones and its clients are recorded and stored for a minimum period of six months.

The information provided in this site is directed at UK investors only. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in France and the United States of America to or for the benefit of United States persons (being resident in the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof).

In order to comply with money laundering and other regulations, additional documentation for identification purposes may be required.

Rathbones shall have no liability for any data transmission errors such as data loss, damage or alteration of any kind including, but not limited to, any direct, indirect or consequential damage arising out of the use of services provided or referred to in this website.

Past performance should not be seen as an indication of future performance.

The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested, particularly if your client does not continue with the investment over the longer term.

Changes in the rate of exchange between currencies may cause the value of an investment to go up or down.

Interest rate fluctuations are likely to affect the capital value of investments within bond funds. When long term interest rates rise the capital value of units is likely to fall and vice versa. The effect will be more apparent on funds that invest significantly in long dated securities. The value of capital and income will fluctuate as interest rates and credit ratings of the issuing companies change.

Tax levels and reliefs are those currently applicable and may change and the value of any tax advantage will depend on individual circumstances.

Investing in emerging markets or small companies may be potentially volatile, as these investments are high risk.

The design, text and images are owned, except as expressly stated by members of the Rathbone Group. They may not be copied, transmitted, displayed, performed, distributed, licensed, altered, framed, stored or otherwise used in whole or in part or in any manner without the written consent of Rathbones except to the extent permitted and under the procedures specified in the copyright Designs and Patents Act 1988, as amended and then only with notices of Rathbones' rights.

Subscribe to the In the KNOW blog email