Rolling the dice or political savvy? What an early election could mean for Brexit

April 21, 2017

By Patrick Ercolano, CFA, MBA
Portfolio Manager

Earlier this year, I visited London, U.K. to meet with some of MD’s research providers (and enjoy some traditional English fish and chips). I was looking for local views on the political and economic climate after last year’s Brexit vote. While my meetings were helpful, I got equally valuable insights from my conversation with a taxi driver on the way back to the airport.

A local’s viewpoint

My cab driver friend was adamant that leaving the European Union will ultimately have little impact on his day to day life. He believes that the U.K.’s new capacity to make its own decisions will far outweigh the benefits of being part of the EU and will allow the country to stop paying for services they don’t need. Whether he’s right or wrong remains to be seen, but I love those insightful cab conversations—nothing beats local opinion.

A strong mandate could provide more negotiating power

Britain saw more political disruption this week as Prime Minister Theresa May threw her cards on the table, calling for a snap election to be held on June 8 of this year. Members of the British Parliament voted in favour of the plan with a 522 to 13 vote.  

Why call an election now, when May is already prime minister and her Conservative party holds a large majority of seats over its closest rival, the Labour party? May was elected by her Conservative colleagues after her predecessor, David Cameron, was forced to resign after the Brexit win. She’s now gambling that an election by the people will give her a majority government mandate and more negotiation power against the EU.

Political gamble or political smarts?

The climate seems right for a strong Conservative victory. On April 19, the polls showed that May’s Conservative party had a 21% lead over the Labour party. Polls can be unreliable at times, but a 21% lead seems a fair bet for victory.

A May-led administration would be expected to govern until 2022, which could reduce the chances of a more abrupt, disruptive U.K. withdrawal from the EU.

Mondrian Investment Partners, our asset manager on the MD International Value Fund, believes an election that results in a Conservative majority should be positive for British businesses, domestic stocks and currency, and likely the U.K. equity market as a whole. Mondrian holds an overweight position in the U.K. compared to the MSCI EAFE Index and has recently added more domestically focused companies like the home improvement retailer Kingfisher and Lloyds, the retail bank.

Is May’s decision really rolling the dice, or is it politically astute? We won’t know until after June 8, but I would vote on the side of political savvy.

We invest in secure sectors

Regardless of the election outcome, MD’s investment approach and portfolio positioning in the U.K. remains consistent. We prefer to invest in high-quality, market-leading companies that possess the financial and strategic strengths to flourish as others falter.

One example is Compass Group, a British contract food service provider held in our MD International Value Fund. With a diverse, global revenue base consisting of guaranteed customers such as schools, hospitals and long-term care homes, this firm has an established track record of resilience during economic downturns. It’s also the parent company of the group that operates MD’s head office cafeteria – so I can vouch for its success!

Once again, it’s up to the Brits

While I expect the Tories to get their larger majority, May will face significant challenges over the next two years of Brexit negotiations. In leaving the EU and seeking complete sovereignty, the U.K. will need to give up some advantages of having been part of a European economic bloc.

“Now is the time for the country to decide,” May concluded in her surprise election announcement. On June 8 it will.  

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