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A New Centre Party, local elections and markets

The local elections on May 3rd may prove to be unusually exciting, both from a political and market perspective.

Jeremy Corbyn launched Labour’s campaign today and made clear his ambition is to seize flagship Conservative boroughs in London, including Kensington & Chelsea, Westminster, Wandsworth and Barnett.

I highlighted this risk in a piece for the CapX website in early January. On the face of it, Labour are well placed effectively to gain total dominance of London following the party’s dramatic performance in the capital city in last year’s General Election. Labour already holds 20 of London’s 32 boroughs, compared to the Conservatives’ eight.

In Battersea, where I live, we got a taster last summer when the amiable Conservative MP Jane Ellison was ousted by a Corbynite firebrand called Marsha De Cordova.

There are a host of reasons for the Labour London surge: stamp duty, Brexit, people tiring of austerity, housing, Grenfell and Theresa May’s comments about the “citizens of nowhere” who live in the metropolis. We can now add to this the surge in knife crime, which despite London Mayor Sadiq Khan’s inadequacies, is being pinned on the Conservatives due to police cuts and Theresa May’s opposition to stop and search by the police.

Only around 35% of the electorate typically manages to summon the enthusiasm to vote in local elections, but there are reasons to think this time could be more interesting.

Investor sentiment and a New Centre Party

Political risk is currently a major influence on investor decisions. Just look at South Africa, where the removal of Jacob Zuma as President in February has since contributed to a five per cent rally in the rand.

The latest survey by Bank of America Merrill Lynch of global fund managers found that a record net 42% were underweight UK equities, mainly because of the related political risks of Brexit and Mr Corbyn’s socialist policies.

Whatever the outcome in May, the local elections bring forward the possibility of a Labour split and the creation of a so-called New Centre Party. Such a split, dividing the left and centre-left vote, would theoretically make a pure Corbyn Government much less likely and, ergo, potentially lead to a rally in the pound and UK equities.

This was trailed in the Observer at the weekend with a peculiar story claiming that a former Labour donor had pledged £50m to create such an entity. You need to understand how politicians think. Political parties don’t split during elections – it is far too complicated – but they can do so afterwards as the success and blame is shared around.

Markets rally in two out of three scenarios

There are three scenarios we can imagine.

First, if Corbyn does well and achieves his objectives of seizing flagship Tory London boroughs, it will arguably enhance his control over the Labour party and further weaken Mrs May. In which case, one can see investors turning even more negative on the UK.

Second, Corbyn does well, but this actually puts the fear into Blairite Labour MPs who these days largely represent provincial seats in the Midlands and the North, like Yvette Cooper (Normanton Pontefract and Castleford) or Dan Jarvis (Barnsley).

They see Corbynism as a London phenomenon and feel so politically tortured by his leadership that a triumph by him in London could finally alienate them. It is hard to estimate how much they loathe Mr Corbyn and all his policies and people. Some of them could finally go their own way.

Third, Corbyn does worse than expected. Given the elevated expectations, this is now a possibility. There is a hint of hubris to Labour’s approach to London and the row about anti-semitism in the party could well act as a deterrent to many of the small ‘l’ liberal voters the party attracted at the general election. To this misstep we must now add his apparent willingness to indulge not only President Putin of Russia but President Assad of Syria.

In recent weeks, according to YouGov, Mr Corbyn’s personal approval rating has plunged to a net minus 25% from plus 8% in December.

Corbyn hubris and Barnett

Of the roughly 270,000 Jewish people who live in the UK, about 160,000 live in London. According to the Board of Deputies, about one in five, or 54,000, live in Barnett alone. It would be a very peculiar thing if Barnett voted for a Labour council as Mr Corbyn seems to hope. Speaking for myself, I will vote for an open and tolerant society every time and so, I trust, will my neighbours.

In this scenario, where Corbyn surprisingly blows it in London, Blairites could feel emboldened to split. Again, UK assets could rally on the basis that the threat of a Corbyn government is receding.

Finally, we should not assume that Theresa May’s position is secure. Her Majority in Parliament is waifer thin. This explains the Government’s tortoise like approach to everything except managing Brexit. We cannot forecast, we can only debate surprises.

It is 1956 and all that again in Westminster

The Establishment may be having a wobble, but things could be much worse

It hasn’t been this bad since the Suez Crisis. That is what some are saying in Westminster. What we still call the Establishment is divided and demoralised, awaiting “clarity” on Brexit. Britain is arguably involved in another international escapade which is being executed incompetently and with insufficient vigour or realism.

There are those who hope, somewhat ungallantly, that the Prime Minister might resign due to ill health, like her predecessor Sir Anthony Eden after the botched Anglo-French-Israeli attempt to reclaim the Suez Canal. The papers are full of treacherous speculation.

As in 1956 those in positions of leadership in politics, in business and even charities are doubly nervous because of changes in the media. They have some sympathy for Theresa May. Who will the media mob turn on next, they ask? Today, it is social media; in 1950s it was television.

Eden was overwhelmed by a censorious global media firestorm. According to the UN, by 1960 there were 56m television sets in the United States and 11m in the United Kingdom, twice the number five years before. The end of Empire was broadcast live on the CBS Evening News and at home on ITN and on BBC News.

60 Tory rebels
In the 1950s, a group of some 60 Tory backbenchers called the Suez Group (sound familiar?), was founded, whose activities were animated when Britain negotiated a withdrawal from the international Canal Zone, which the British Government part-owned and administered.

Eden has since been represented as an Imperial dinosaur, but actually his policy was organised withdrawal from Empire, leaving behind a string of bases (including in Suez), some hopefully friendly governments and that amorphous thing traditionally prized above all else by the British Establishment: “influence”.

But Eden was at the beck and call of the Suez Group, and Sir Winston Churchill, who made way for him as Prime Minister in 1955, was their idol. As ever, Churchill’s policy was to never to surrender. On the other side was the pro-Soviet and anti-Western President Nasser of Egypt who nationalised the Suez Canal in July 1956. There was widespread indignation in Britain and in France and a fear that trade with Asia would be cut off.

The role of the media was to argue for resolute action when the Suez Canal was nationalised, but as the affair unfolded it dramatically turned on the Government until only the Daily Express (circulation, 4 million copies a day) supported Eden.

The Treasury and the Bank of England don’t like it
The Treasury and the Bank of England were both against military action by Britain and France without American support. Although the economy was recovering from the war and unemployment was at a record low, the pound was fixed to the dollar at $2.80. The fear was it would not survive a speculative attack.

The economic situation was exacerbated by the fact that half our oil supplies came through the Suez Canal (as did much of our goods trade). Traffic was blocked and the oil price went through the roof. Petrol rationing was introduced. Many ex-colonial countries and corporates had sterling deposits which they began to withdraw from London and soon the Bank of England’s foreign exchange reserves started to dwindle.

The IMF found a role
The International Monetary Fund likes to claim that Autumn 1956 was its baptism of fire, the first time it provided emergency lending. Initially, the Americans (who had always opposed colonialism and saw the British and French as playing into Russian hands) blocked a loan to support sterling. This was the proximate reason why Britain and France halted military action in November 1956. They had sent their air forces, a naval task force and paratroopers to the Canal, supposedly to prevent Israel and Egypt from fighting each other. This was a ruse.

Gaitskell was no Corbyn
However, the comparison between now and 1956 has its limits and should not be taken too far. Eden had in fact just won an election the previous year handsomely, with a majority of 60 seats and a majority of the popular vote. A change of party leader did not bring with it the risk of a collapse of the Government and letting in a Jeremy Corbyn-style figure. The Labour leader was Hugh Gaitskell, a charismatic moderate who played both the press and international opinion skilfully.

The stakes are much smaller now too. Eden lying to Parliament about the covert agreement with France and Israel to intervene is surely worse in magnitude than the infamous “£350m for the NHS” claim. No military action is in prospect today; nor isolation at the United Nations; nor a bailout from the IMF. And President Trump publicly supports Brexit, whereas Eisenhower opposed the Suez campaign. In other words, this time round a sensible outcome should theoretically be possible to negotiate, at some point, as long as we take a global approach and work to keep international opinion on side (not much sign of that).

Markets don’t like weak governments
That said, the parallels are instructive. Markets do not like weak governments and it is noticeable that the Government’s recent travails have left the FTSE 100 underperforming global markets. It is also remarkable that the British economy has so far withstood the constantly negative outpourings of the financial press, business lobby groups etc. One wonders how long it can do so. The construction industry PMI, for instance, last month showed activity is flatlining and new housebuilding has gone off a cliff.

As 1956 turned to 1957, the front runner to replace Eden was actually RAB Butler. But Harold Macmillan, the cunning chancellor, was the person who was surprisingly supported by most of his colleagues to be Prime Minister. Macmillan had been pro-military action but then changed his mind after the Americans failed to support it.

Who is Macmillan now? My guess, for what it is worth, is Michael Gove. He may be the Harold Macmillan of Brexit, the only man with the attention to detail and ability to appeal to both sides of the Conservative party.

A diplomatic resignation
Macmillan had a reputation for deviousness and subsequently noted that if Eden had not resigned due to ill health, a “diplomatic resignation” might have been required.

A “Theresa May resigns through ill-health” scenario might be cowardly, but it is convenient for some. A resignation on health grounds, accompanied by some liberal dollops of spin and hypocrisy, would avoid a vote of no confidence among Conservative MPs. A prolonged leadership election in which Tory members can vote might also be avoided, to be replaced by a coronation. There is one issue: public support for Mrs May is deeper outside the Westminster bubble than inside it. Sometimes it seems her critics, rather than she, are having a wobble.

Macmillan leads a recovery
Macmillan actually recovered well from the Suez debacle. Perhaps helped by a positive relationship with President John F Kennedy, he adapted to the requirements of television. He actually accelerated the withdrawal from Empire and ostentatiously ordered the Polaris independent nuclear deterrent. He rebuilt the “special relationship” with America. He went on to win the 1959 election with a 100 seat majority accompanied by the soundbite “we have never had it so good”, before coming unstuck himself four years later.

Until the Vietnam War and oil crises threw the West off course, the 1960s were a time of relative social and economic idyll. Macmillan re-oriented Britain towards membership of the European Economic Community – at the time, a trade partnership – as a new anchor for British foreign policy. Which takes us back to where we are today. Who has the strength and vision to re-anchor Britain now? We will have to wait and see and in the meantime console ourselves with the ultimate lesson from the Suez Crisis: things could be a whole lot worse.

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