Morgan Stanley has placed one in three odds that Jeremy Corbyn will be the UK prime minister by the end of next year as divisions among the Conservatives over soft versus hard Brexit trigger elections in the second half of 2018.
The major US bank predicts a two in three chance the UK faces a fresh round of elections next year with a 50:50 chance of either major party winning.
The potential for a Corbyn-led government has already been adding to fund manager caution on the UK.
Morgan Stanley also suggests there is a 10 per cent chance that Brexit doesn’t happen at all, but says this is most likely under a Labour government, due to its focus on jobs in its approach to Brexit compared to the Conservative Party’s focus on sovereignty.
A comprehensive research note, written by economists Jacob Nell and Melanie Baker and a team of strategists, says negative real wages hurting consumption data will be a major driver for sterling, which it expects to weaken further, especially against the euro.
Sterling is likely to be the biggest influence on UK equities, says equity strategist Graham Secker. The bank has previously predicted the pound to reach parity with the euro in Q1 2018.
Downside growth risks means the bank does not share the market’s expectations for a 20bps rate rise by the end of 2018.
While Morgan Stanley expects the Conservatives to hold themselves together for now, it expects that unity will break in H2 2018 as the outcome of Brexit talks become clearer.
“We expect the associated political instability to drive weaker consumption and investment, and push growth to a standstill,” the research says.
The Labour Party’s stated jobs-first Brexit has more flexibility than the Conservatives’ focus on a sovereignty-first exit from the EU, Morgan Stanley says. Conservative MPs supported the EU referendum policy and promised to respect the result.
However, it notes Labour official policy is opposed to freedom of movement, is committed to exiting the EU and that Corbyn is unlikely to actively campaign to reverse Brexit.
Both parties have shown a softening in their stance towards Brexit with Labour now supporting a transitional arrangement within the single market and customs union, while the government recognises a possible ongoing role for EU institutions and acknowledges financial obligations.
“With a majority in parliament supportive of close ties with Europe, we think that the minority government will struggle to pass the legislation for a ‘sovereignty-first’ version of Brexit,” the paper says. “We think that the UK has the weaker hand in the negotiations, and will be worse impacted by an uncooperative outcome to the talks.”