OK. So Boris Johnson is on the way out, and a replacement is on the way in.
As Conservative party leadership elections go, this is actually quite an interesting one (or maybe I’m just getting old). There’s no obvious guaranteed winner candidate, for a start.
But there’s also the fact that Johnson’s leadership style was so distinctive that there’s also no real “continuity” candidate; whoever comes in is going to be a new broom.
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It’ll also suck up all the headline space for the next however many months it takes to sort out.
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So here’s the really important question for us: how much does all of this matter for investors?
In the good old days, everything was a convergence trade
Broadly speaking, during the 1990s and the 2000s – ie, the investment life of most people reading (and writing) this, politics didn’t matter for markets. This is all tied up in Francis Fukuyama’s much-derided “end of history” quote.
That is, the Berlin Wall had fallen and China was opening up for business. It was just a matter of time before we were all free-trading global capitalists, and widespread democracy would surely follow swiftly behind.
The latter dream cracked a lot earlier than the former, but for much of the period, everything was a “convergence” trade.
Everyone agreed that a cuddly, New Labour-ish form of capitalism was the right way to go. The consensus was so great that political parties were briefly seen as virtually interchangeable.
It’s weirdly hard to remember now because things have changed so drastically, but there was a point in the 2000s where there were endless think pieces about how stagnant our politics was, and complaints about how both Labour and Conservative basically agreed on everything.
And it wasn’t just in the UK. The eurozone was a convergence trade. You took all those diverse member states at different levels of development, harnessed them together with a single currency and monetary policy, and they could all get Germany’s credit rating, because of course, no one would let the eurozone fall apart.
Emerging markets were a convergence trade (especially after the messiness of the 1997 Asian financial crisis and Russian default). The Brics (Brazil, Russia, India, China) were the big ones, but with capital markets opening up and deepening across the globe and money actively seeking risky opportunities, where you invested wasn’t as important as the story you could tell about the Westernisation of emerging-market consumers.
Obviously, a lot of this was surface. And, as ever, you had individual countries running into trouble. But it’s amazing how much money you can make from a surface story being believed by a lot of people for a long time. Just look at any bubble in history.
So that’s what we were used to for a while. Individual politicians could come and go. “Gridlock” (a common occurrence in the US) was deemed good, because it meant interfering politicians would stay out of the way.
But what really mattered in the end was that everyone agreed: globalisation (which I’d argue is a somewhat different thing to capitalism or even free markets, but that’s a can of worms to put aside for now) was an unalloyed good and anyone who objected was just a sore loser.
We’re diverging now – and that means anything could happen
Those days are long gone. It’s clear to me (though others may well disagree) that the consensus was wobbling badly, but was dealt a mortal blow by the 2008 financial crisis. In many ways, we’re still getting used to that idea. But this is why I think investors have to get used to the idea that politics matters again.
There is no consensus anymore; lots of things are up for grabs, so it’s worth remembering that there have been plenty of periods in very recent history in which the government made the running for huge chunks of the economy.
If you look back before the 1980s in particular, you’re looking at a UK where at various points, the government controlled everything from the amount of money you could take out of the country when you went on holiday, to corporate dividend policies, to businesses ranging from airlines to utilities to car manufacturing.
I suspect most of us don’t really think in our heart of hearts that this could happen again. But governments across the world are heavily indebted and already implementing various forms of financial repression (put simply, forced saving at below-inflation levels).
What happens when one of them ends up having some sort of crisis? Do we get more heavy-handed interventions? And what happens when our politics goes from a “growth” mindset towards a “redistribution” mindset?
I’m not talking here about any specific policies proposed by any of the new would-be prime ministers on parade. But you do have to remember that we have a general election coming up within the next couple of years and we have a very sticky economic situation.
Discontent is probable; scapegoating tends to be a go-to political strategy in those circumstances; and a lot of interventionist policy is the possible result.
And to be clear, this isn’t party political. I don’t think investors should be at all comfortable with the idea that a Labour Party still haunted by the spectre of Jeremy Corbyn might get into power. But Rishi Sunak’s last Budget also demonstrated that the unfortunate Gordon Brown / George Osborne tendency to showboat while making everything more complicated is still firmly intact.
I’ll cross my fingers and hope that the next prime minister will have a plan for reducing taxes (or maybe even looking at a land value tax? Too much to hope for), considering the role of the state and making sure that it is effective in that role (maybe scrutinising the third sector a bit more closely too?), and just generally getting things done rather than constantly relying on gimmicks.
But as an investor, I think it makes sense to prepare more generally just for chopping and changing and the occasional nasty surprise.
How? Diversification is boring advice, but there’s a reason people always say “diversify”. The range of politically sensitive sectors is likely to grow – it won’t just be the usual ones like oil and utilities. So it makes sense to spread your bets.
Use your government-mandated tax shelters (Isas and pensions), but don’t overly rely on one (history shows that pensions are easier political targets than Isas - at least, so far).
And keep your options open more than perhaps you normally would. In the investment world, that means hanging onto a bit more cash.
