The way is clear for Brexit in January 2020

Following the Conservative Party’s victory in the UK parliamentary elections, the country is now poised to leave the EU on 31 January 2020. But the capital markets will continue to grapple with the issue of Brexit because the situation is still far from resolved.

An article by

Dr. Jörg Zeuner, Chief Economist, Union Investment

Boris Johnson has won the parliamentary elections, leaving the way clear for an orderly Brexit to be completed within a matter of weeks. And not before time, many market players would say. The leader of the Conservative Party is interpreting the vote as a strong mandate from the electorate for his new deal with the EU. There is unlikely to be any further resistance in the House of Commons, as both Johnson’s critics within his own party and the opposition Labour Party now have a significantly weaker base in Westminster. The United Kingdom is therefore set to leave the European Union on 31 January 2020.

This is good news for the capital markets, because it means the marginal risk of the UK crashing out without a deal is now off the table. But the stock markets will continue to grapple with the issue of Brexit, because the next step now will be to renegotiate the trading relationship between the EU and the UK. This will involve resolving such a huge number of complex issues that the negotiation of the ‘divorce’ agreement will look like a walk in the park. Until all the details of the long-term trading relationship have been finalised, the situation therefore remains uncertain. This uncertainty is likely to take a further toll on the UK’s investing activities and on growth. The markets will not be able to consider Brexit done and dusted even after the UK has officially left. The short-term investment opportunities are correspondingly limited.

However, the longer the process takes, the more likely it is that economic realities will prevail. With his strong electoral mandate, Johnson is no longer beholden to those MPs within his own party who are vehemently demanding that the UK completely sever all ties with the EU. We therefore see an opportunity for a closer economic relationship. If this type of solution should emerge, the UK’s capital markets are likely to gain as sterling should appreciate and equity markets rise. That is unusual, as the fortunes of London’s stock market are usually negatively correlated with those of the currency. Many of the companies with a listing in London operate around the world, meaning that a weak pound gives them a competitive advantage and higher profits in their home currency. After pricing in the prospect of a close trading relationship, there is the potential for gains both in terms of share prices and the currency. That makes equity investments in the UK attractive again going forward. UK government bonds, conversely, are likely to suffer in this risk-off scenario.

Union Investment forecasts

BIP 2019 & 2020
  1. As at 13 December 2019