Following his election as party leader, tomorrow, Boris Johnson will be confirmed as Prime Minister. With this appointment, Johnson has been set a clear mandate from Conservative Party members to leave the European Union, with or without a deal on the 31st of October. The Brexit referendum gave the government a mandate to leave the EU, however, it did not detail how this would be achieved. It could be argued that those who voted to leave expected a deal to be agreed and a smooth exit would follow. MPs have voted against both the deal negotiated by Theresa May, and against leaving without a deal. May had hard line Brexitiers to accommodate, and was unsuccessful. Johnson is the choice for those hard-liners, but he may face, at least, as much opposition as May did from the Remainers in his own party. Leaving without a deal could be a negotiating ploy to get a better deal from the EU. The EU would prefer the UK to leave with a deal, but with Parliament ready to block a no-deal Brexit, is it a toothless threat? Can Johnson force a no-deal? He has refused to rule out proroguing Parliament in order to achieve this. He is up against the clock with both Parliament and the EU.
The day after Johnson's appointment to Prime Minister, Parliament is due to start the summer recess, which will last until the 3rd of September. Less than two weeks later, Parliament will be in recess again for the party conference season, returning around the 8th of October. In other words, parliamentary time between now and the 31st of October spans just four weeks. European leaders will inevitably be on holiday between now and the end of August, so getting their attention could prove difficult. The EU is still sticking to the line that they will not reopen the deal, so what was promised by Johnson, may not be able to be delivered in the time available. With no other proposal, the UK will leave the EU without a deal on the 31st of October. Parliament, however, could vote for a further delay. Proroguing Parliament appears to be the only way to deliver a no-deal Brexit. When Parliament is prorogued, existing legislation will continue to stand, however, parliamentary business will be suspended until after the state opening of Parliament. So, how does this happen?
The prorogation of Parliament usually occurs on two occasions. The first when a general election is called, the second at the end of a parliamentary "session". In both cases, it ends with the ceremonial state opening of Parliament and the Queen's speech. A general election usually takes around six weeks, so calling an election after mid-September would leave Parliament prorogued and unable to vote for an alternative Brexit date before the 31st of October deadline. In which case, the UK will leave without a deal. Under the fixed-term Parliament Act, a two-thirds majority in Parliament is required or a series of no confidence votes which could require cross-party co-operation. The other way to prorogue Parliament is to call an end to the "session", the parliamentary year. The last session started with the state opening of Parliament in June 2017 after the general election. It was prolonged to allow Brexit legislation to pass, so an end of session is overdue. Proroguing Parliament to avoid a vote in Parliament was last used in 1948. This has the potential to draw the Queen into politics, which has traditionally been avoided. The Queen is the only person with the power to prorogue Parliament, technically on the advice of the Privy Council, but in practice, at the request of the Prime Minister. It would be hugely controversial to do this to engineer a hard Brexit, but it remains an option if Johnson wants to give his threat some teeth.
From an investment point of view, Johnson's threat of a no-deal Brexit has caused the pound to weaken, thus supporting companies with overseas earnings. From an economic standpoint, the UK got a boost in the first quarter of the year, as companies stockpiled inventories ahead of the 31st of March deadline. This uplift was reversed in the following quarter and the economic data declined. We may see another inventory re-stocking ahead of the 31st of October, but this is likely to be less than what occurred in March, as companies have been caught wrong footed once already. The uncertainty around Brexit has caused delays in investment decisions, and with weaker economic data, the Bank of England is no longer expected to raise rates any time soon. The UK equity market remains unloved by international investors, but with a dividend yield of 4.7% and ten-year gilts yielding only 0.7%, Brexit aside, UK equities look attractive. Any solution to Brexit will provide welcome clarity for the way forward and enable companies to plan with a degree of certainty. This should also entice international investors to return to the UK market. However, for now, the fog of Brexit remains, and the new Prime Minister may find his hands tied just as much as his predecessor.
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