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The negotiation stage: Article 50's impact on the rest of Europe

Article | 29 March 2017

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Article 50 has been triggered and French and German elections are fast approaching. Read our European equities team’s outlook for how these events will impact European markets.

Britain’s pre-announced, long-anticipated decision to trigger Article 50 and formally start the Brexit process has come as a surprise to nobody. Judging by the market’s reaction so far, it has been a non-event.

The focus now shifts to the negotiation phase. Over the next 2 years, observers and market participants will be searching for hints and looking for clues about the nature of the relationship between the UK and the European Union (EU).

Markets do not like uncertainty, so some volatility could be expected on either side of the Channel during negotiations, as contentious topics are tackled.

The views we held at the time of the referendum result last year remain true today. From an economic perspective, we expect a continuation of the Eurozone recovery, underpinned by an accommodative monetary policy, less austerity, a more favourable FX rate and some structural reforms. Europe has proven remarkably resistant to global macro-economic turbulence and its recovery, being largely driven by domestic demand, is hard to derail. The European Central Bank also remains ready to act and able to counter any near-term pressures caused. Therefore, we see less risk of lasting damage to the rest of Europe from the Brexit process.

On the political front, we think it is too simplistic to assume that a Brexit-type vote is easily replicable in Continental Europe. The recent Dutch election is a very good example, where the pro-EU and right-of-centre VVD party won the largest number of seats in the lower house, and a number of other mainstream pro-European parties of various political hues did well. Geert Wilders’ anti- EU and far-right PVV failed to make a meaningful breakthrough. Rising radical politics in some European countries does not necessarily mean radical governments in power. The mechanisms by which radical parties can actually turn into fully fledged governments, call and implement referenda to exit the EU are often just not there. There are significant legal and political hurdles in each country which make referendum risk much smaller than in the minds of many people.

As we go through the European electoral season and as the political landscape becomes clearer, the political risk premium on Europe should fade in our view, raising new investment opportunities for active stock-pickers to exploit. The more potent driver to long-term equity market returns is not politics, but rather, economic and corporate fundamentals – and to us these look refreshingly sound.

Important information

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Where the Invesco Perpetual European Equities team have expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco Perpetual investment professionals.

Tags: Equity