The promise of 2020

11 mins. to read
The promise of 2020
Michael Tubi /
Master Investor Magazine

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What a difference a week makes. The new Johnson government possesses a mojo which is likely to last out 2020. Nothing is guaranteed, as ever; but the outlook for UK investors is promising, writes Victor Hill.

Remain surrenders

On 14 December Lord Heseltine, one of the Barons of Remain, conceded that Remain had lost. Other such Barons formed a silent guard behind him.

This is analogous to the Kentish Barons swearing fealty to William of Normandy at Swanscombe in November (?) 1066, in return for which they were permitted to retain their privileges. Hence Kent was able to adopt the county motto Invicta (unconquered) though no one doubted the reality of its condition. Saxon resistance to the Norman Conquest was to continue for another 10 years – especially in remoter parts of England such as East Anglia where Hereward the Wake led a campaign against the new dispensation.

The election of 2019, like the battle of Hastings in 1066, represents a moment when a nation fundamentally changes direction. No one now doubts that we shall cease to be a member of the European Union at 23:00 on 31 January. A transition period will then obtain until 31 December – and, it now seems, will not be extended under pain of law. Thus the UK will become a “third party” outside the EU in 2021.

The conventional wisdom is that the eleven months provided by the transition period is insufficient to conclude a comprehensive Canada-style free trade agreement and that there is a high risk of a no-deal Brexit after all, though a delayed one. As the new parliament convened in Westminster on Tuesday (17 December) the pound fell on speculation of exactly that. How realistic is Mr Johnson’s strategy?

Europeans for Boris

The European nomenklatura was rooting for Boris. The mandarins would have been horrified if Mr Corbyn, with his anti-NATO and soft-on-Putin outlook, had won. They desperately want closure to the Brexit melodrama: it has never been in Europe’s interest for Britain to be riven by a slow-burn civil war. Germany has already paid a high price – in terms of falling exports to the UK at a moment when industrial production is falling rapidly – for Monsieur Barnier’s strategy of pushing the UK up against a wall. (Fun though the French elite may have found that.) Even the Irish have lost the pleasure of tweaking their historic overlord’s tail.

Sterling, persistently undervalued against the euro since 2016, has been giving the UK a competitive advantage relative to the EU as a whole and especially against Germany. The postponement of new investment in the UK may even have fed through into falling output in Europe which is highly sensitive to demand from the UK.

What’s more, most major European countries have been going through their own political turbulence over the last year.

France is proving more difficult to reform than President Macron anticipated. Not only is the country still plagued by mass strikes and demonstrations but Monsieur Macron’s government has been hit by resignations. In Germany, the SPD has lurched towards the left. They now support a wealth tax, a rent freeze and a tightening of Germany’s free-market labour laws. As a result, Frau Merkel’s coalition is looking increasingly fragile.

In Spain, there is still no government after two general elections in a year (one in April and one in November). The centre has not held: the uber-populist Vox achieved 15 percent of the popular vote last month. In Italy, Signor Salvini’s Lega Nord, now out of power, is on the march as the economy stalls.

In every major continental country, even in those with long-established democratic models like France, traditional party systems have collapsed. In early 2020 it will become apparent that Britain is the only large economy in Europe with a strong government able to undertake radical reform. Brussels can no longer adopt a divide-and-rule strategy. Further, the idea that Britain has earned the undying acrimony of Europe by walking out does not bear close inspection.

One of the most surprising developments of the Johnson premiership has been the affinity between the two men who preside in London and Paris. This is reflected in the remarkably harmonious body language between the two when they meet. The British position on Iran, climate change and Russia is much closer to Monsieur Macron’s than Mr Trump’s. Despite Monsieur Macron’s comments about NATO (he said it was “brain dead”) the French know that there are only two European military powers – the UK and France.

The French now believe that the federalist project can be accelerated without Anglo-Saxon foot-dragging. But they are sincere in wanting close and warm relations with Albion Perfide. It is Paris that will have its cake and eat it.

People’s Johnsonism

Mr Johnson’s brand of conservatism is of the one-nation kind in which all classes and groups are rallied under the national banner. Adherents of McCorbynism will call that populism – but it is in fact much closer to social democracy, though without the globalism. His conservatism will also have a green tinge: the prime minister’s father is a distinguished conservationist and, by the way, his partner is an environmental activist too.

Winning dozens of seats in the north of England which have been Labour for generations was an extraordinary feat; but Mr Johnson is conscious that this support must be retrenched in order for it to be retained in 2024. (He is thought to have a ten-year time horizon for his premiership.) The lion’s share of the £100 billion earmarked for new infrastructure should, in my view, be spent in the north – starting with the Manchester to Leeds Crossrail project. (Good news for construction companies like Kier (LON:KIE) and building materials producers like Breedon Group (LON:BREE).)

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Left wing parties dependent on the tribal allegiance of the indigenous working classes are in decline globally. In the 20th century, organised labour was animated by metropolitan socialist intellectuals. That model doesn’t work anymore. Those who self-identify as working class are a dwindling band; and even those who remain working class and proud of it are increasingly at odds with the metropolitan (e.g. Islington) lefties who claim to represent them. The somewheres no longer trust the nowheres.

The Tory Remainers no longer exist. The government has a stonking majority. The left is in disarray. The prime minister is now no more beholden to the ERG (the Tory ultra-Brexiteers) than he is to the DUP. He is more powerful than even Tony Bair was in 1997.

The wall of money…

From an investor’s point of view, security has been restored. There will be no wealth taxes or forced purchase of assets at less than market value by a confiscatory Marxist regime.

Goldman Sachs has identified $150 billion “back-loaded acceleration” of global capital ready to flow into the British economy. This is likely to finance all the growth that the UK has lost during the years of the Brexit impasse. The bank anticipates that growth will come in at above two percent for at least three years. That is why the FTSE-250 index is up by over five percent in the last week. Messrs Johnson and Javid have pledged an expansionary fiscal policy – and the markets don’t seem to mind.

On the currency front, HSBC is expecting a structural re-rating of sterling with the pound surging to €1.35 over the next year from its current level of around €1.20.

Why a free trade deal is likely by the end of 2020

During Mrs May’s tenure the Europeans negotiated in bad faith. They refused to discuss contingency planning in the event of no-deal; they prohibited regulatory agencies from holding technical talks with their British counterparts; and they declined to reciprocate when the UK guaranteed the status of EU nationals. They insisted on “sequencing” the negotiations in a way disadvantageous to the British.

If the Europeans play hardball under Monsieur Barnier, as they did with Mrs May, then Mr Johnson can always threaten to embrace Mr Trump and his beautiful trade deal. (The British people have decided that the idea that the NHS is up for sale is a cynical trope.) That would likely mean some kind of tariff regime between the UK and the EU. Regulatory alignment means a great deal to the EU as it is the guarantee that the UK cannot obtain any kind of competitive advantage. The UK can get a bargain by putting regulatory alignment on the table.

Critically, Brussels cannot now negotiate with London in the knowledge that any future deal could be vetoed by the British parliament or people. There isn’t going to be another election in the UK until 2024. The word is that, this time, prioritisation will trump sequencing.

Some kind of freedom-of-movement-lite might be offered in exchange for concessions by Brussels on financial services. No doubt Farage & Co. in its next political incarnation will make noises about that. But many of us will embrace the chance to retire in France, Spain or Croatia. As Churchill said: An Englishman has the right to live where he damn well likes.

Ambrose Evans-Pritchard envisages “a rapid trade deal with no tariffs or quotas and with fast-track customs clearance, light certification and minimal pedantry over rules of origin”[i]. Rules around services may be carried over to 2021, but a trade agreement is likely to be concluded within the deadline.

If there is indeed a deal by Christmas next year then the market reaction is likely to be euphoric. Remainers may find that the new dispensation is not as fearful as they thought. Hereward the Wake will fade away. I’d be surprised if the FTSE-100 is trading below 8,000 this time next year.

The Scottish Question

Looking at the new electoral map one sees a sea of blue across England, the Welsh marches and the Scottish borders, with a few splurges of red in the major conurbations. Mr Johnson’s challenge will be to extend the appeal of one-nation post-Brexit conservatism north of the border where the Tories lost six seats to the SNP this time round.

Let us recall that the SNP got 43 percent of the vote in Scotland – so that 57 percent of the Scottish electorate voted for unionist parties. Further, we know that many Scots habitually vote SNP but voted NO in the 2014 referendum. They believe that Scotland’s voice in Westminster is best voiced by a tartan clad party; but they do not believe that Scottish separation would be in Scotland’s best interest. Therefore, it is by no means certain that Ms Sturgeon would win a second referendum on Scottish separation, even if it were granted to her on favourable terms. (Incidentally, further to a change in the law, no future referendum could be pitched in terms of a YES-NO answer.)

Ms Sturgeon’s strategy, like that of right wing parties in Europe in the 1920s and 1930s, is to make her ultimate goal look inevitable. In that end the mainstream media has indulged her generously. While the considerable force of the BBC news machine is dedicated to the forensic examination of policy in Westminster, its scrutiny of policy in Holyrood is pitiful. No SNP ministers have been called to explain why educational attainments – and many health outcomes – lag those in England, despite a massive advantage in spending north of the border.

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Scotland’s public expenditure per capita is significantly higher than the whole of the UK – £13,854 versus £12,193 – though many Scots don’t know that, given the constant mantra of austerity. Higher spending and lower taxes mean that Scotland is running a de facto fiscal deficit of about 10 percent of GDP. This means that Scotland could not possibly be granted EU membership – even if she were to embrace a hard border with England (which would have catastrophic economic consequences anyway).

Nobody, including the SNP’s Growth Commission, has come up with a coherent solution to this. An independent Scotland would have to hike taxes substantially or impose an austerity programme much more severe than that experienced by the UK over the past decade. Or, very possibly, both. I do not think Scottish voters would say YES to that.

Moreover, the exposures of Scotland’s financial sector amount to about eight times the country’s GDP. Without the Bank of England to guarantee them they would be as fragile as Iceland’s were in 2008 in a financial crisis. If Scots voted for independence, every major financial institution in Scotland would move to London.

In terms of any future negotiations between Westminster and Holyrood, Mr Johnson has the upper hand. Even a partial restoration of Scottish waters to Scottish fishermen will be popular in Scotland. Once the Scots are persuaded that Brexit is not the nightmare that Mrs Sturgeon has depicted, support for the SNP will decline.

I wrote in the summer that selecting Mr Johnson as prime minister was a huge gamble for the Tory Party and the country. It was – and it has paid off. We should not underestimate – as I did – the acuity of Mr Johnson’s calculus.


This is my last post of an extraordinary year. Happy holidays – and see you in 2020.

[i] Daily Telegraph, 14 December 2019.

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