A big cloud lifts on 'Brexit election' result. Now what?
Prime Minister Boris Johnson’s resounding general election victory, with the Conservative Party on track to gain a 79-seat majority in the British Parliament, has cleared the way for Brexit and a promised first phase by Jan. 31, 2020. His next challenge: gaining support from the European Union (EU) and his own Parliament on a final deal that will determine the U.K.’s future trading relationship with the EU and the rest of the world. This could take some time.
Still, a big cloud has been lifted. From my discussions on the ground in London this month, it was clear that everyone from cabbies to shop keepers to business executives suffered from “Brexit fatigue” and just wanted it to be settled. Longstanding uncertainty over what’s to come saw the U.K. economy register its slowest annual growth rate in nearly a decade, despite the efforts of an accommodative Bank of England. Johnson’s clear mandate may well bolster his ability to forge a softer EU trade agreement without bowing to demands from either the far right or far left—similar to those previously negotiated by Norway, Switzerland and Canada.
Soon after the polls closed late Thursday night, sterling already gained ground, rising to its highest level since June of 2018. As trading began today, the FTSE 250 jumped, as well. Removal of the Brexit cloud and Johnson’s pledge to boost government spending is sure to lift consumer confidence. Near term, the election results likely will support U.K.-oriented sectors that benefit from a rising yield curve, such as home builders, banks and utilities. The downside of a rising pound, however, could fall on the more internationally focused U.K. companies since their earnings would be worth less when translated back into pounds.
Outcome adds to risk-on argument
Longer term, as Johnson and the Conservatives move to deliver on their campaign promise to “Get Brexit Done,” expect more twists and turns. Delivering a final trade agreement by year-end 2020—to which Johnson has committed—and anticipated disruptions in terms of redirected capital investment and supply chains and related increases in business costs will be challenging. Further questions in terms of tamping separatist rumblings in Scotland and preventing a hard border in Ireland also hang in the balance.
One thing is clear: this overwhelming election result will do wonders for restoring clarity over the U.K.’s relationship with the EU and is almost certain to lift sentiment in the rest of Europe, as well. From a global perspective, this market-friendly outcome coincided with a phase-one U.S.-China trade agreement. More cloud-lifting, all pointing to a risk-on environment heading into the New Year and beyond.