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Boris Johnson resigns – what investors need to know

With Boris Johnson resigning as prime minister, here’s a closer look at who could be next in line and what it all means for investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

In addition to inflation and a deteriorating outlook for the UK economy, investors now have political uncertainty to contend with.

Boris Johnson has said he is resigning as Conservative party leader and as prime minister (PM). His current plan is to stay on as prime minister until October, while the Conservative party choose a new leader.

But with dozens of cabinet resignations, sackings, appointments, press statements and announcements on social media, in the last week, that timetable could change rapidly.

The rules for choosing a new PM

At times of tumult, it is often easy to forget that we live in a rules-based country. A prime minister must retain the confidence of the House of Commons. That is the constitutional position.

It is unlikely there will be a wholesale change of government to one formed by the opposition Labour party because the Conservative party has a notional majority in the commons of 73. The question is who they wish to choose as their leader and as next prime minister.

The process for choosing a Conservative leader can be prolonged. The rules are that a series of twice-weekly knockout rounds are held among Members of Parliament, overseen by the Executive of the backbench 1922 Committee. The final two are then put to the party’s estimated 150,000 membership. The whole process can take around two months.

However, there have been occasions when it has been expedited by the person coming second in the parliamentary round dropping out. That is what happed in 2016 when Andrea Leadsom withdrew, leaving Theresa May as winner. David Cameron said he would resign as Conservative leader, but stay on while a contest was run. Mrs May was announced as new leader just 19 days later. There was no need to hold the vote among party members.

Who could win?

Conservative leadership elections are notoriously emotive and personalised affairs, and the outcome can be hard to predict.

On this occasion there will be numerous candidates.

As it stands, a poll of Conservative Party members on 4 July puts Ben Wallace, the Defence Secretary as favourite.

Conservative Home poll of potential party leaders

Answer choice Responses
Ben Wallace 119 (15.76%)
Penny Mordaunt 117 (15.50%)
Liz Truss 105 (13.91%)
Tom Tugendhat 53 (7.02%)
Nadhim Zahawi 50 (6.62%)
Jeremy Hunt 48 (6.36%)
Steve Baker 47 (6.23%)
Kemi Badenoch 42 (5.56%)
Rishi Sunak 39 (5.17%)
Dominic Raab 36 (4.77%)
Michael Gove 31 (4.11%)
Sajid Javid 21 (2.78%)
Priti Patel 18 (2.38%)
Graham Brady 15 (1.99%)
Mark Harper 14 (1.85%)
Total 755

However, polls like this one should be treated with caution. We don’t yet have a full list of candidates and much can happen, including surprising personal revelations, during a contest.

Ending the uncertainty

The problem with political uncertainty is it creates doubt about three things many investors consider before deciding where to put their money. These are tax rates, public spending and what laws and regulations might apply in the future.

Theoretically a leadership contest will help resolve differences and bring an end to the recent period of political and economic uncertainty. That might be one reason the pound briefly jumped over $1.20 on the news that Boris Johnson is resigning.

Measures investors might not like, such as the energy profits levy, or windfall tax on oil & gas companies, and the proposed increase in corporation tax from 19% to 25% could be held up or abandoned altogether. The windfall tax legislation has been published in draft form, but has yet to be put before parliament.

Those hoping for a change of government to one led by the opposition Labour party and Keir Starmer will probably have to wait. The five-year deadline for the end of this parliament and the next election is over two years away, in December 2024.

The new constituency boundary changes recommended by the independent Boundary Commission won’t be implemented until next summer. Assuming the Conservative party stays in office, its new leader, the new prime minister will likely focus on tackling urgent issues like inflation, before risking going to the polls.

George Trefgarne is CEO of Boscobel & Partners, a political consultancy. Hargreaves Lansdown may not share the views of the author.

The impact on markets

Susannah Streeter, Senior Investment and Markets Analyst

While the mood music might have changed in Westminster with Boris Johnson finally deciding to leave 10 Downing Street, the UK stock market has held up well. The pound’s also strengthened against the dollar, heading back up to $1.20 before dipping back slightly. The pound’s wavering path indicates that traders believe it’s not quite the end to the political stalemate and there could be more uncertainty to come.

While we don’t know who’ll be next in line, whoever ends up being appointed has a lot to deal with. One of the biggest problems, certainly for investors, is soaring inflation. Investors are welcoming the laser-sharp focus being trained on inflation, and there are ripples of relief in financial markets that the red-hot prices look set to be brought down.

The Bank of England is taking a similar stance to the Fed across the pond, with higher interest rates firmly on the table, despite the fragile state of the economy. The Bank’s Chief Economist Huw Pill, stressed attention will be trained on making life more affordable through attempts to drive prices back down – this is more than welcome for stock markets.

The key point to remember in all this political uncertainty is to think back to your long-term strategy. No matter what happens, good investing principles stay the same. So, while you can't always control how your investments perform, you can control how you prepare your portfolio.

Remember, investing is a test of nerve and knowledge, and experience is an asset you simply can't buy. So be patient, be diversified and let time do the hard work for you.

The dos and don’ts of diversification

This article isn’t personal advice, if you’re not sure what’s right for you, seek advice. All investments fall as well as rise in value, so investors could get back less than they invest.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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