The UK Election and Brexit: 3 Reasons the Markets Are Celebrating
Brexit may finally happen in 2020, and markets celebrated, albeit briefly. British stocks (the FSTSE 100 Index) gained more than 3% Dec. 9 – 13, on UK election results, which gave control of Parliament to the Conservative Party. What this means is that Prime Minister Boris Johnson now has the means to make Brexit happen by January 31, 2020.
And we now have an updated timeline for Brexit. The UK will split from the European Union (EU) on January 31, 2020 at 11pm GMT to be precise. However, this is just the start of actual Brexit. There will be a post-Brexit “transition” phase, which could last until 2021 and be further extended to 2022. During the transition phase, no change in the relationship between the EU and UK is stipulated, which is meant to give the UK enough time to negotiate a trade deal with the EU. A recent twist is that Boris Johnson has promised to be done with the transition period by the end of 2020, regardless of whether there is a trade agreement in place. Is 11 months enough time to come up with a comprehensive trade agreement and have it ratified by 27 EU parliaments? As has been the case with Brexit, only time will tell.
Here is why the markets reacted so positively initially to a Conservative win:
1. Uncertainty about the next steps and whether Brexit will happen subsided, and as everyone knows, markets and business do not do well with uncertainty.
2. A no-deal Brexit is less likely (basically the UK crashing out of the Eurozone without a plan), since Boris Johnson now has a significant majority in Parliament, which he can use to push through Brexit on January 31, 2020 based on the plan approved in October by the EU parliament. Still, there is some concern about a no-trade-deal Brexit, given Johnson’s recent statement about ending the transition phase by the end of 2020.
3. The Labour party’s nationalization agenda is on hold. The call for nationalization of Britain’s energy/utility industries, made by the Labour Party in 2017, would have included water, electricity, gas companies and also railway operators and broadband providers. This would have given the UK government control of these grid/services for the first time since 1990, when they were privatized under Prime Minister Margaret Thatcher. And this move would have put power and communications companies with Eurozone operations under the control of the UK government. Needless to say, UK utilities were up 6.7% in US dollars terms between Dec. 9 and 13, with communications gaining 4.7% and the financial sector 5.5%.
But it will not be easy going. The UK, and Johnson, need to begin negotiating trade deals with other countries, including the US, and begin investing in an extensive fiscal package to support any slowdown that might happen during and after Brexit.