STATE Street Corporation announced on October 17 its latest Brexometer research, measuring the sentiment of institutional investors in relation to Brexit developments.
The research revealed that two-thirds (66%) of institutional investors believe the United Kingdom (UK) leaving the European Union (EU) without a deal on October 31 will have a negative impact on global markets, with almost one in three (31%) expecting serious implications.
If the UK secures an agreement before the set deadline, however, then 71% of institutional investors expect this to have a positive impact on markets.
But if an extension is agreed that results in a general election and or a second referendum in the UK, 43% of institutional investors think global markets would react negatively to the level of continued uncertainty this would create. This is compared to less than one third (32%) who think the opposite.
“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,” says Jörg Ambrosius, head of Europe, Middle-East and Africa at State Street.
Despite uncertainty, the level of potential short-term volatility could be seen as a good investment opportunity with 14% of institutional investors expecting to increase their holdings of UK assets (equities, bonds and alternatives) over the next six months, compared to 12% who will hold less; a seven percent drop from Q3 2018.
The research also finds that, as a result of Brexit, institutional investors are developing an increasingly negative and risk adverse view of the world with 41% - an increase of 11% from Q1 2019 and a record high - expressing a negative view on prospects for medium-term (three to five years) global growth.
The results help explain why 47% of institutional investors are looking to reduce risk in their portfolios over this time period, compared to just 23% who are looking to increase it.
“Our 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,” said Michael Metcalfe, head of Global Macro Strategy at State Street Global Markets.
“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,” he adds.
More than two thirds (68%) 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% expect it to increase with a deal.
“The most obvious route through which markets have expressed their concerns regarding Brexit is the currency markets,” said James Binny, global head of Currency and head of Investments, Ireland at State Street Global Advisors.
“At times the swings in mood have led to exaggerated moves, giving opportunities for longer term investors, including those based in the UK who have used the weakness in sterling to increase hedges and therefore locking in profits from overseas investments,” he notes.
Almost half of respondents (46%) believe the value of UK equities over the next three months will increase slightly with a deal secured, compared to 37% who expect it to decrease significantly without a deal, and slightly more than one in ten institutional investors (11%) believe Brexit will have a significant impact on their business operating model, down 11% from Q1 2019.