UK Election Result Delivers (Some) Brexit Clarity

Economic Blog
December 13, 2019

Boris Johnson is still the Prime Minister of the United Kingdom (U.K.) after the British public voted Thursday to give his Conservative party a clear victory.

After a contentious campaign dominated by the prospect of the U.K.’s withdrawal from the European Union (E.U.), or Brexit, the Conservatives gained a large majority of Members of Parliament (M.P.), campaigning to “get Brexit done,” beating out the opposition Labour Party, who advocated a second Brexit referendum.

This parliamentary majority for the Conservatives could signal an end to much of the gridlock that has occurred recently in the U.K. Parliament and provide some much needed clarity with regards to Brexit.

Mr. Johnson’s Brexit deal likely will now be ratified by the U.K. Parliament by the January 31, 2020, deadline, and the next challenge will be to agree on the terms of the U.K.’s future trading relationship with the E.U.

The Brexit deal laid out the terms of a transition period for the U.K. to remain in the E.U. single market and customs union until December 31, 2020. During that time the U.K. and the E.U. will need to agree to the terms of any free trade agreement.

An extension to the transition period looks likely, especially to avoid an abrupt and potentially economically damaging exit without a trade or customs agreement in place, similar to a “hard Brexit.” As such, the political and economic uncertainty has shifted from the actual Brexit date to the length of the transition period and the ability of the U.K. and E.U. to agree to trading terms.

As shown in the LPL Chart of the Day, the British pound sterling (GBP) has been on a bumpy ride since the initial Brexit vote in June of 2016.

British-pound-has-been-on-a-bumpy-ride

“We hope this election result brings some clarity to the Brexit process as Europe’s political woes have been a headwind for investors for some time,” said LPL Financial Chief Investment Strategist John Lynch. “However, Brexit has generally been a minor concern for U.S. stocks, which have continued to rally on a strong U.S. consumer, accommodative monetary policy, and progress on U.S.-China trade negotiations.”

As mentioned in our 2020 Outlook, we remain cautious on Europe’s growth potential and developed-market equities outside of the U.S. given continued political uncertainties and lackluster economic growth.

For more of our investment insights, check out our Outlook 2020: Bringing Markets Into Focus.

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This Research material was prepared by LPL Financial, LLC.

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