Meanwhile, Across the Pond

KCS Wealth

September 11, 2019

You think things are a bit unsettled in Washington, DC these days? Perhaps you can take comfort that politics is even more chaotic in London right now. In the 6 weeks since Tory Boris Johnson became Prime Minister, he has taken the Brexit process to a new level of crazy. He ran for Prime Minister on a platform that can be succinctly summarized as “Brexit or Death;” he may well get his wish for the latter.

Not that Boris is in any imminent danger of dying, but his political career is already on life support (and he did say last week that he’d rather be “dead in a ditch” than request another Brexit delay.) He has lost every vote in Parliament, including trying to force a “hard Brexit” on Oct. 31. (Parliament instead passed a bill requiring him to ask for another 3-month delay.) He then pushed for snap elections before the Oct. 31 deadline, but was stymied on this as well; elections will not take place until at least November.

Enraged by Tory party members who voted against him, Boris sacked 21 of them from the party (apparently the UK Prime Minister can do this), including 8 former cabinet ministers. And this was after another one of his M.P.’s (Members of Parliament) defected to the Liberal Democrats in the middle of one of his speeches, ending his party’s majority in Parliament. Among those he kicked out of the party was the country’s longest-serving M.P., a seventy-nine-year-old former Chancellor and Home Secretary known as the “Father of the House.” A handful voluntarily quit, including Boris’ younger brother, Jo Johnson. Boris thinks he can pick up seats in a new election, but we’re not so sure.

Another gambit Boris tried was shutting down Parliament during October, hoping to preclude legislation preventing a hard Brexit. He got his 3-week shutdown (the longest in British history) but couldn’t avoid legislation requiring him to ask for an extension. Now he’s trying to figure out if he can defy Parliament without going to prison. We wouldn’t count on him succeeding at this, either.

What does this mean to us here in the US, particularly as investors? Since their lows in mid-August, both the UK pound and the FTSE 100 index of UK stocks have rallied modestly, suggesting that investors aren’t all that freaked out by the chaos in London. While there is no near-term resolution to Britain’s political struggles in sight, it does seem that a majority of M.P.’s now wants to avoid a hard Brexit. And that is good in the short run. In the long run, we may still get Brexit, but first agreeing to a deal that both sides can live with will significantly smooth the transition.

Financial markets, and the world in general, are always facing risks, some of which are obvious and some of which are not. It’s the hidden risks that pose the biggest threat to our wealth, as well-known hazards are quickly priced into markets. Remember, too, that the best times to invest are not when things seem safe but when chaos reigns. That is certainly true in the UK right now, as well as in Hong Kong and, some would say, the US. Hence, we think that now is not the time to become defensive. Rather, you want to reduce portfolio risk when everything seems bright and sunny (e.g., 2000). Now is not one of those times.

Yours truly,

The KCS Wealth Investment Management Team


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