UK election result to benefit European equities
European equities should receive a boost from the recent UK election results, as business and consumer confidence improves in the region in 2020 following greater certainty around the Brexit process, according to Eaton Vance.
The fund manager’s director of global equity, Christopher Dyer, said the UK Conservatives’ commanding majority should make the process of the UK’s withdrawal from the EU more efficient and less uncertain.
“It has been a decade since the UK had a party in power with such a significant majority, which should empower the government to operate more efficiently domestically and in discussions with the EU,” Mr Dyer said.
“While a trade deal with the EU has yet to be negotiated, the commanding Conservative majority in Parliament removes any question of whether Brexit will happen — the UK will definitively leave the EU at the end of January 2020 and enter into a transition period until December 2020, during which existing trade agreements will remain in force.”
Mr Dyer said the assurances this result provided to business should drive increased investment in European companies and a more positive outlook for stocks in the region going into 2020.
“We expect this clarity after years of ambiguity about Brexit to result in an improvement in business and consumer confidence, as well as an acceleration in corporate investment in the UK and Continental Europe that had been delayed by Brexit uncertainty,” he said.
“In our view, this is clearly positive for European equities, which have lagged US stocks since the Brexit vote in 2016 and now trade at a significant discount. As a result, we find that European stocks are attractive.”
However, Mr Dyer cautioned there was still a minimal risk of the UK leaving the EU without a trade deal in place, which could have an impact on markets through the year.
“The trade deal to be negotiated between the UK and the EU does present the lingering possibility that there could be a ‘hard Brexit’ — that is, the UK exiting the transition period without a trade agreement and reverting to World Trade Organisation rules,” he said.
“As his opening salvo in the trade negotiations with the EU, Prime Minister Boris Johnson pledged on 17 December that the December 2020 transition period cannot be extended.
“The news flow around these discussions could create some financial market volatility in 2020. But we believe that the strength of the Conservatives in Parliament should enable the government to reach a suitable trade deal with the EU.”