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PM Johnson Suspends Parliament in Bold Move

3 September 2019EuropeEconomicsPolitics

British MPs are crying afoul after Prime Minister Boris Johnson received the Queen's approval to suspend Parliament from Sep 9 and to resume on Oct 14. This move has further heightened the risk of a no-deal exit on Oct 31, as it dramatically limits the time available for Parliament to manoeuver an alternative solution or to block a no-deal exit.

Citi analysts believe the parliament could trigger a no-confidence vote, however, the chances of defeating PM Johnson appear low. It relies on how many Conservatives vote to bring down their own government, and ignore the green shoots of hope from recent EU meetings (EU officials' agreement to look at alternative UK suggestions for the Irish backstop). In the event of a successful no confidence vote, PM Johnson might call a general election in five weeks, just before the EU summit (Oct 17-18).

PM Johnson Suspends Parliament in Bold Move

Past performance is no guarantee of future results, real results may vary

Citi's investment strategy remains unchanged

  • Avoid immediately chasing any recovery rallies in GBP or equities and only trade on confirmed developments not speculation, as uncertainty may be high for the next six weeks.
  • However, Citi analysts see opportunities for both GBP and equities at lower levels over the next six weeks. This is based on two assumptions:
    • 'No-deal' remains possible, however will be less of an economic catastrophe than previously expected and less than the market is discounting.
    • Labour party losing support in all the indicative snap general election polls. The party's probable hard-left economic policies would likely be business-unfriendly.

Equities - The average price-earnings ratio (PER) of 12X and dividend yield of 5.1% look attractive. Citi analysts prefer liquid blue-chip exporters with high dividend yields.

Currency - On a real effective exchange rate basis, GBP is trading near historic lows. Citi analysts expect further short-term GBP weakness as both ‘no-deal' and a snap general election are fully discounted.

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