The U.K. election has one big winner: The thesis that “getting Brexit done” after 3½ years of uncertainty is the only thing that really matters. Reality will likely prove more complex.
On Friday, the Conservative Party won the U.K. parliamentary election with the biggest majority since the days of Margaret Thatcher in the 1980s. It was an even better result for sitting Prime Minister Boris Johnson than opinion polls published ahead of the election suggested.
The pound jumped about 2% against the euro after an exit poll published late Thursday and held its gains as the vote count continued early Friday, reaching its highest since 2016. Throughout the election campaign, markets have rallied whenever the chances of a Conservative majority increased and dropped at any whiff of an outcome that may have put leftist firebrand Jeremy Corbyn in charge.
The problem is that investors’ apparent position, however consistent, never made complete sense.
While Mr. Corbyn’s policies had much that investors were scared of—like nationalizing utilities—he was unlikely to enact them, given that no poll even came close to suggesting he could govern without support from centrist pro-European parties. Such a Corbyn-led coalition would have ensured either a very soft Brexit or its cancellation altogether, a position that most investors think is better for the U.K. economy.
By contrast, the Brexit deal that Mr. Johnson has reached with European officials includes the possibility of a much starker trade divergence with the European Union, which Conservative lawmakers now have all the power to enact.
Yet investors seem to have embraced the idea that the uncertainty created by the never-ending Brexit negotiations was worse than any Brexit outcome.
The voters seem to have wholeheartedly agreed with this verdict, proving the shrewdness of Mr. Johnson’s strategy of openly confronting Parliament and blaming it for blocking Brexit. Mr. Corbyn’s Labour Party, on the other hand, promised yet another renegotiation of the terms of exit followed by a second referendum. Labour has now lost constituencies in its formerly impregnable “red wall” such as Blyth Valley in the north of England. With its working-class roots, Labour had held Blyth Valley since 1935, but the former mining area has a large share of pro-Brexit voters.
“Get Brexit done” was the Conservatives’ key campaign promise. But Mr. Johnson’s deal doesn’t put sterling on a solid footing, given that it involves years of complex trade negotiations. Furthermore, the other winner of Thursday’s election was the Scottish National Party, which will push for a second referendum on the country’s independence. The first such referendum in 2014 sparked volatility for the pound.
While it is good news that the Brexit saga is one step closer to a resolution, the turnover in lawmakers is far from ideal for markets. The previous Parliament could have risen to Mr. Johnson’s challenge by agreeing on a softer Brexit, but chose an election instead.
This isn’t to deny that there were worse outcomes for investors: A slimmer Conservative majority, for example, would have given extreme pro-Brexit members of the party more power. Also, trade talks might be less politically charged than they were before the election, given Mr. Johnson’s clear mandate, thus allowing many fund managers to start bringing money back to the U.K. without alienating their clients. Those who invested in the U.K. with longer-term goals could start to reap benefits.
Turning the page on Brexit, though, will be harder than both voters and traders seem to believe.
Source: The Wall Street Journal