New research undertaken by State Street Corporation (State Street) on institutional investors’ sentiments towards Brexit developments reveals that almost two thirds (66 per cent) believe that the UK leaving the European Union without a deal on 31 October 2019 will have a negative impact on global markets.
Almost one in three (31 per cent) expect “serious implications”.
However, if the UK secures an agreement with the EU before the set deadline, then 71 per cent of institutional investors expect this to have a positive impact on markets. In the case of an extension being agreed or a second referendum in the UK, 43 per cent of institutional investors think global markets would react negatively. This is compared to the 32 per cent of investors who think the opposite.
Jörg Ambrosius, head of Europe, Middle-East and Africa at State Street, says: “It’s no surprise that Brexit is having a significant impact on global markets, and whilst a confirmed decision is unlikely until the eleventh hour, the vast majority of our clients have factored in the different scenarios to their investments and business models.
“Instead, what the industry will be looking at now is how these contingency plans fair in weathering the Brexit storm. Despite all this uncertainty, we continue to be well-positioned and dedicated to being our clients’ essential partner.”
Despite the uncertainty, the level of potential short-term volatility could be seen as a good investment opportunity. 14 per cent of institutional investors expect to increase their holdings of UK assets over the next six months, compared to 12 per cent who will hold less. This is a seven per cent drop from the third quarter of 2018.
State Street’s research also finds that, as a result of Brexit, institutional investors are developing an increasingly risk adverse attitude, with 41 per cent expressing a negative view on prospect for medium-term global growth. This is an 11 per cent increase from the first quarter of 2019 and a record high. Following this, 47 per cent of institutional investors are looking to reduce risk in their portfolios over this time frame versus the 23 per cent who are looking to increase it.
Michael Metcalfe, head of Global Macro Strategy at State Street Global Markets, comments: “Our Brexometer survey was concluded just before the wilder swings in sentiment of recent days, but still provides a pathway to how investors will react to the next steps.
“As expected, investors are close to unanimous that a deal would be good news; this is especially true for global markets generally and sterling, but a little less for UK equities. This makes sense given the likely sterling appreciation. A no deal in contrast would be a significant drag on sentiment for all assets.
“While neither of these findings are particularly shocking, it is interesting to note that a delay is not seen as especially positive. This is testament to the ongoing investor uncertainty created by Brexit. And on this point, it is telling that when asked about their future plans for the size of their UK asset holdings, almost one-fifth of respondents simply ticked the ‘don’t know’ box.”
Other key findings of the research include:
• More than two thirds (68 per cent) of institutional investors believe the value of sterling over the next three months will decrease if the UK leaves the EU on 31 October without a deal, while 75 per cent expect it to increase with a deal
• The number of institutional investors with a positive outlook for global economic growth fell to 28 per cent, a four per cent drop from Q1 2019 and 15% drop from Q3 2018
• 11 per cent of institutional investors believe Brexit will have a significant impact on their business operating model, down 11 per cent from Q1 2019
• Almost half (47 per cent) of institutional investors believe asset owners will decrease their level of investment risk over the next three to five years, a seven per cent increase from Q1 2019
• 46 per cent of respondents believe the value of UK equities over the next three months will increase slightly with a deal secured, compared to 37 per cent who expect it to decrease significantly without a deal
“The most obvious route through which markets have expressed their concerns regarding Brexit is the currency markets,” says James Binny, global head of Currency and head of Investments, Ireland at State Street Global Advisors. “Sterling has clearly expressed the views reported by the Brexometer research as it has fallen when the news flow has been negative, as a no deal appeared more likely, and bounced as the chances of a deal appear to have risen. At times the swings in mood have led to exaggerated moves, giving opportunities for longer term investors, including those based in UK who have used the weakness in sterling to increase hedges and therefore locking in profits from overseas investments.”