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2 reasons why Brexit is still going to affect the Lloyds share price in 2020

Jonathan Smith
Pawns decorated with the UK and EU flags

With everyone now back after the holiday season, most of us hopefully managed to avoid talking about Brexit around the dinner table. However, the events post-general election and surrounding Brexit are worthy of comment, as they are likely to drive financial markets throughout the year. 

In particular, Lloyds Banking Group (LSE: LLOY) has shown sensitivity to the changing fortunes surrounding Brexit progress over the past few years, something that I feel is unlikely to change any time soon.

Sign on the dotted line

The vote in Parliament that passed in late December was with a commanding majority of 124 votes, due to the landslide Conservative Party victory in the general election earlier in the month. But while the passing of the Withdrawal Bill means the UK will leave the EU on January 31, the real work is only just getting started. 

From here, the UK will enter a transition period through to the end of the year in order to agree trade deals, firstly with the EU and then with other nations further afield. Therefore, from a corporate point of view, Brexit uncertainty will be ongoing until trade deals are signed between the UK and other countries and trading blocs. 

For Lloyds, this means that the share price will still be buffeted by news flow on the back of either positive or negative developments on this front. For example, back in October when legislation was passed that prevented a no-deal scenario on October 31, the share price jumped 10% in two weeks, due to the optimism this carried with it.

Now, while I do not want to commit to whether trade talks will go poorly or well, these talks (and their ability to go badly quite quickly) are certainly worth being aware of when seeing large upward moves in the stock.

Domestic sentiment

Given the negative sentiment in 2019 regarding Brexit, it was no surprise to see this affecting the UK’s economic performance. In the second quarter, we saw GDP growth turning negative, with the worst reading in a long time (-0.2%). Added to this was the performance of the British pound, which remained at depressed levels against the US dollar and euro for most of the year.

This hampered Lloyds, with CEO António Horta-Osorio saying in October that “continued economic uncertainty could further impact the outlook” for the business. And even if a trade deal is agreed on, I think it will take time for domestic demand here in the UK to return to previous levels.

This means that from a retail perspective, consumers looking to take out loans or take on a mortgage are unlikely to jump straight in the day after a trade deal is agreed on. They would probably wait a few months to see how the situation pans out. This lag could mean a drag on any share price appreciation for Lloyds in 2020.

Overall, the trade talks and slow rebound in domestic demand are both likely to weigh on the performance of the share price this year. As an investor therefore, I would wait and see until some sort of Brexit resolution has been arrived at.

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Jonathan Smith owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020