Investment Clock insights

May’s honeymoon to continue – for now

Trevor Greetham

14 July 2016

New Prime Minister Theresa May has appointed senior voices from the Vote Leave camp to important roles in her first cabinet with, David Davies minister for Brexit negotiations, Liam Fox in charge of trade deals and, prompting some incredulity overseas, Boris Johnson as foreign secretary.

While, on the face of it, these appointments make an exit from the EU seem more likely to happen, they harden Britain's negotiating position. Market stress is likely when the going gets tough. Meanwhile, while aggressive Bank of England action is assured, the new chancellor Philip Hammond was a major supporter of the last government's austerity programme, casting some doubt on the prospects for a large fiscal boost.

This interpretation quite possibly misses subtleties in May's choices at the top table. There is an old saying that you should keep your friends close and your enemies closer. If the UK economy plunges into recession, talks grind to a halt and public opinion swings decisively against Brexit, May, a quiet Remain supporter in the referendum campaign, will survive and the blame will lie squarely with the proponents of the decision to leave the EU. 

Likewise, in selecting a fiscal hawk as chancellor, May could keep financial markets on side while delivering a larger than expected fiscal stimulus, perhaps employing leverage via a government backed infrastructure fund and tabling other incentives for business investment.

Stability of any kind is better than the chaos of the last couple of weeks. The honeymoon in markets will probably continue for a while longer. For the time being Europe, and Germany in particular, is in damage limitation mode. Expect a photo opportunity with Angela Merkel, with whom Theresa May has a lot in common.

Before long, weak economic data and less sympathetic European voices will come to the fore. Doubts will also rise about the euro area's long-term viability. Market participants are already talking about Italy's constitutional referendum scheduled for the autumn, which could see centrist Prime Minister Matteo Renzi cede influence to populist anti-euro politicians. 

With policy loose and U.S. growth prospects improving, we are positive on global equities for the longer term but we anticipate more bouts of stock market volatility before the summer is out and further downside for sterling. Such developments could present good longer-term buying opportunities, but we are not there yet. 

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.