Impact Blog
With Conservative majority in UK Parliament, Brexit is likely to happen

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      By Christopher M. Dyer, CFADirector of Global Equity, Portfolio Manager, Eaton Vance Advisers International Ltd.

      London - The resounding Conservative victory in the UK general election on December 12 has important implications for European politics and equity markets. 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 European Union (EU).

      While a trade deal with the EU has yet to be negotiated, the commanding Conservative majority in Parliament means the UK is highly likely to 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.

      Hard Brexit still possible

      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 Organization (WTO) rules. As his opening salvo in the trade negotiations with the EU, Prime Minister Boris Johnson pledged on December 17 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.

      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.

      Bottom line: In our view, this is clearly positive for European equities, which have lagged U.S. stocks since the Brexit vote in 2016 and now trade at a significant discount. As a result, we find that European stocks are attractive.