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By Brent Puff - January 31, 2020
After three and a half years of political wrangling that resulted in much uncertainty in global markets, “Brexit Day” has finally arrived. Investors may wonder how to prepare for this new political arrangement because some uncertainty remains.
European Union (EU) lawmakers approved the Brexit deal ratified in the U.K.’s December 2019 snap election. This paved the way for the U.K. to officially leave the EU on Jan. 31, 2020, at 11 p.m. GMT.
Only modest ceremonies marked the event. Many citizens on both sides of the Brexit debate appeared more focused on proceeding to the next phase of the process—negotiating a new trade deal with the EU by Dec. 31, 2020. The U.K. must also work out new agreements with other trading partners, including the U.S. and China.
Little will change after the U.K. officially exits the EU. During the transition period, the U.K. will continue to be bound by EU rules and regulations. However, it will no longer have representation in the European Parliament to influence those rules. Neither party will impose tariffs or change trade rules as they negotiate a new deal.
With only 11 months to negotiate a new agreement, it’s unclear how the U.K.’s economy and currency will ultimately be affected. Some investors expect an arrangement like Norway’s, where the U.K. remains tied to EU regulations without representation to change them.
The EU will monitor compliance with rules regarding immigration and the treatment of EU citizens living in the U.K. The U.K. has agreed to abide by existing rules through the end of the year. However, U.K. lawmakers are debating how to handle immigration quotas and work visas after December 31, 2020.
How will this new arrangement affect U.K. equities? We believe the outlook for the U.K. has improved now that Brexit has occurred and removed some of the uncertainty. U.K. equities and the pound have rallied with the prospect of an orderly exit from the EU. But questions remain about how the negotiations and final details will play out.
The U.K. and EU must still negotiate and approve a formal trade agreement. Can this be executed to the U.K.’s benefit in less than 11 months? Negotiations for new trade agreements could prove to be as complicated as Brexit negotiations. In that case, there remains a danger the U.K. could ultimately leave without a deal.
We think the outlook for U.K. stocks will remain cloudy until there’s more clarity. In the meantime, domestic-focused companies and the U.K. economy may rebound. We will continue to evaluate U.K.-based companies with significant international operations on company-specific results.
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