UK Growth At Risk As Theresa May Prepares to Depart

Theresa May's resignation at Prime Minister is likely to hit sterling and the economic growth, and does not guarantee a resolution on Brexit

Holly Black 24 May, 2019 | 2:34PM
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As Theresa May prepares to leave Number 10, market commentators are expecting UK economic growth to take a hit.

It was well signposted that May was likely to announce her resignation as Prime Minister today. After a tumultuous three years in the top job, the PM will step down on June 7 with a leadership contest likely to start the following week.

Elliot Hentov, head of policy at research at State Street Global Advisors, said: “Today’s resignation is neither surprising nor a meaningful market event. Since the second, rejection of her Brexit deal in early March, May was likely to leave office.”

Indeed the FTSE 100 climbed on the news, up 0.8% by lunchtime. But the coming weeks could bring more volatility to the stock market as uncertainty over who will be the next Prime Minister and how this will affect Brexit is likely to make investors skittish.

Hentov said: “The next PM will face an immediate showdown: seek another Brexit extension from the EU or enable a messy ‘No Deal’ crash.” He thinks another extension is the most likely course, with the next PM likely to be more pro-Brexit than their predecessor.

For the UK, a change of leadership is likely to have a negative effect on business confidence and investment decisions. Economic growth, which has been accelerating this year, could now fall back while the value of sterling could also take a hit.

Chris Towner, director at consultancy JCRA, said: “Although widely expected as she approached the podium, sterling still traded frenetically for a short period of time, before dropping back to a more settled level.”

Jake Robbins, fund manager at Premier Asset Management, says the UK looks “fairly fragile”, particularly in terms of trading with the EU. He adds: “But that doesn’t mean stock markets are necessarily going to fall: unemployment is low and wage growth is exceeding inflation, so people should feel wealthier, and the Bank of England could add further monetary stimulus, which tends to be positive for financial markets.”

Guy Foster, head of research at Brewin Dolphin, says investors would be wrong to assume that May’s departure will end the impasse. While a second referendum may now be less likely, if MPs can’t agree on how to move forward then there could be a General Election, adding more uncertainty to the mix.

He adds: “Eventually a new leader may be able to galvanise support around a specific path, but it is difficult to anticipate that at this stage. In the meantime, however, it is reasonable to be concerned that our lack of effective government may eventually have economic consequences.”

Perversely, of course, the worse that sterling does the further the FTSE climbs. Around three-quarters of the earnings from companies on the UK come from overseas and that means they get a boost to their bottom lines when the pound falls against the dollar. That could make the FTSE a decent place to invest in the coming months amid the expected Brexit-related chaos.

Tristan Hanson, manager of the M&G Global Target Return fund, adds: “UK equities offer geographic and industry diversification and a dividend yield of almost 5%, which seems very attractive compared to yields on cash and government bonds.”

For other assets, the outlook may not be so positive, and property prices could potentially fall. David Zahn, head of European Fixed Income at Franklin Templeton, says that yields on UK Government Gilts are also likely to decline as money floods into safe haven assets.

For most investors, the key is to be patient, says Adrian Lowcock, head of personal investing at Willis Owen: "Markets are volatile in the short-term and it can be hard to predict their movements. Making knee-jerk decisions based on short-term news is unlikely to help investors achieve their long-term goals."

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk