Another UK political turnaround? - Nomura

Analysts at Nomura explained that in a speech earlier this year at a regular spring conference, they boldly stated that having spent the 2014 edition of the conference discussing the Scottish referendum, the 2015 edition discussing the general election and the 2016 edition discussing the Brexit referendum, at least in 2017 there were no UK political events to discuss. 

Key Quotes:

"Just over two weeks after this statement was made, Theresa May announced the 2017 general election. Once bitten and twice shy and all that. So even if the REAL grey swan for UK politics in 2018 would be if nothing interesting happened, that would not give us much to write about. 

The tail risk we consider, therefore, is if political instability gets so bad that either / or another general election or a second Brexit referendum occurs in 2018. While it is ex-post easy to see why Theresa May called the 2017 general election (a 20 point opinion poll lead is catnip to any politician), there is no such case now. Under the Fixed Term Parliament Act there are two ways to call an early election. The first, à la 2017, where the government chooses to dissolve parliament with a two-thirds majority in the Commons can be ruled out, we think. So if it did happen it would be because the government has lost a vote of no confidence (and not being able to win another one within two weeks). 

Ordinarily, this would be unlikely, but the government’s wafer-thin effective majority makes it a possibility and public attempts have been made before. In particular, we would highlight that all it needs is some Conservative (or DUP) lawmakers to get annoyed with the way Brexit is going that they are prepared to bring down the government and risk (from their perspective) a Jeremy Corbyn-led government. Because of how polarising Brexit has become in the UK, this is a risk that cannot be ruled out. The other potential political event is a second Brexit referendum. Again parliamentary mathematics is the key here. Around 75% of MPs (including a slim majority of Conservative ones) are pro Remain. So why are they pushing through Brexit legislation? They are enacting the will of the people as set out in the 2016 referendum. 

Of course, the will of the people can change. Over recent months we have seen a slim majority in the polls saying in hindsight it was wrong for Britain to vote to leave the EU. If this trend continues and that slim majority becomes a commanding one this may embolden Remain MPs on all sides of the house to push for a second referendum, perhaps on the outline of the actual deal the UK agrees with the EU. There is an issue of timing here – as things stand there is not a huge amount of time to fit in a referendum. This is why it would be a tail risk. The really interesting question is what sort of tail risk because there are two different options here. 

The question could ask whether to accept any deal or instead remain in the EU. Or it could ask whether to accept any deal or crash out of the EU altogether. The market implications of these two different questions would be very different!"