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Blog Posts — August 23, 2019

Boris Johnson’s ROOF™ Report Card

Boris Johnson became Prime Minister of the UK on July 23, 2019 by wrestling the leadership of his party from Theresa May. We use the Axioma ROOF Scores based on the newly released AXUK4 model to quantify investors’ expectations of the new PM in the run-up to his nomination, and the report card they have given him since taking on the job.

After months of speculation about her future, Theresa May stepped down as her party’s leader on June 20, 2019. And so began the process of naming a successor. Since mid-May[1], pollsters had been hard at work. Boris Johnson was the leader by far in every poll and the presumptive nominee. We can therefore take the ROOF scores between early May and July 24th as a measure of investors’ expectations for his leadership.

The chart below shows the ROOF scores for the UK All-caps market portfolio (AXGB-LMS) from the start of May up to the day after Boris Johnson’s nomination as PM. 

ROOF Score for Great Britain – All Caps From: 4/1/2019 To: 7/24/2019

We can see that, following Parliament’s rejection of her third Brexit deal with the EU in April, investors became more and more disenchanted with Theresa May. Since the first poll showed Boris Johnson as a strong favorite to succeed her on May 16, investor sentiment began to recover. While Johnson’s initial campaign statements about his plans to handle Brexit rattled investors (see dip in sentiment in early June), the increased certainty about the next British PM pushed sentiment to a high of +4.2 on his nomination day. Investors were clearly cheering the end of a leadership vacuum in Europe’s second largest economy. But what do they think of their new Prime Minister now that he’s been on the job for a few weeks?

The chart below shows the UK ROOF scores since Boris Johnson took office on June 24, 2019. What a difference a few public appearances make! With every vitriolic speech on the issue, a hard Brexit scenario became more and more likely. The problem for investors is that none of the possible options[2] on October 31 look palatable. So, where do we go from here?

ROOF Score For Great Britain – All Caps From: 7/24/2019 To: 8/16/2019

Knowing who their Prime Minister is resolved only one of investors’ uncertainties. The difference in the BOE’s response to a hard versus a soft Brexit is quite stark and so uncertainty continues until clarity comes to that all important question. And while it seems that we are no longer asking ‘if’ but ‘when’ the UK will leave the EU, the manner of ‘how’ it does so, matters a great deal to investors.

On September 3rd, Parliament resumes for a short session[3]. Labour leader Jeremy Corbyn has already vowed to bring a motion of no confidence in the newly born government, so little in the way of clarity can be expected until after that vote is cast. Whether Boris Johnson will remain Prime Minister of Britain for long, only time will tell.  For now, investors have curbed their enthusiasm about the ability of a simple change in party leadership to lead to clarity and seem – at best – only willing to give him the benefit of the doubt as the UK heads for the Brexit wall ‘sans’ brakes.

[1] The first poll taken by YouGov on May 16, 2019 gave Boris Johnson a 67%-33% lead over his rival, Jeremy Hunt.

[2] A renegotiated deal? A suspended Parliament and a forced no deal? A request for the UK’s fourth Brexit extension? A general election? Or an unprecedented demolition of the government?

[3] Typically lasts around two weeks before there is another break, while the political parties hold their annual conferences. The exact length of this session has not been announced.