Money managers say they are investing in the U.K. stock market again following Prime Minister Boris Johnson's resounding victory in U.K. snap general election Dec. 12.
But even as Mr. Johnson managed to recover a parliamentary majority for the Conservative Party, which roughly a week later backed his Brexit plan to formally leave the European Union by Jan. 31, the post-election euphoria could turn out to be short-lived.
The U.K. is set to negotiate a new trading agreement with the EU with a deadline at the end of 2020.
And, if no trade deal can be struck on time by Dec. 31, 2020, the U.K. will trade with the EU under the World Trade Organization's General Agreement on Tariffs and Trade come Jan. 1, 2021. Mr. Johnson could in theory request a two-year extension to the negotiation period in July 2020 — if the current schedule is too tight — but his EU Withdrawal Agreement Bill approved by MPs on Dec. 20 is preventing such an extension.
Once the U.K. leaves the EU, the country will need to negotiate independent trade deals with Europe and all its other trading partners.
Industry sources said the U.K. is more likely to reach a basic trade deal rather than a sophisticated one by the end of 2020. But despite trade concerns, the election outcome in the short term has boosted the U.K. stock market, particularly the FTSE 250, which was up 13.3% on Dec. 20 from March 31, when Brexit negotiations started to stagnate.
"The U.K. is investible again," Sue Noffke, head of U.K. equity at Schroders PLC in London, said in a conference call, adding that U.K. midcap equities, which are 75% exposed to the U.K. economy, have been boosted by the outcome of the general election.
The pound sterling was flat against the dollar at $1.30 on Dec. 20 vs. $1.30 on March 31, while the FTSE All-Share index rose 5% in the same period.