#Market Strategy — 23.06.2016

Britain Votes For Brexit

Roger Keller


A negative impact on risky assets

  • The vote to leave the European Union is a surprise.

    Over the past few days, the financial markets have been increasingly discounting a “Remain” vote, so the impact of the “Leave” vote on prices is very significant. Initial market reactions are of course very emotional. The extent of the impact on the markets could be mitigated by reactions from policymakers, particularly from the Bank of England and the ECB. Officials made it clear that they were preparing to take action to stabilise markets and provide liquidity, if needed.

  • The vote is not legally binding; the British Parliament will have the final word and the responsibility to notify the European Council of the intention to withdraw from the EU. From that moment, negotiations will take place and this could last two years or more.

  • Since the decision to leave the EU is fuelling broad uncertainties and will impact economic prospects, it is hurting the outlook for risky assets. The negative impact on financial markets is due to investors seeking higher risk premiums.

The foreign exchange impact

  • The most affected currency is of course the Pound Sterling; it has plunged by more than 10% to its lowest level since 1985, into the GBP/USD 1.30-1.35 range forecast by consensus. Against the euro, it has risen from 0.765 to 0.82. A decline which is much more limited as the latter is another victim of the Brexit vote, falling against the dollar from nearly 1.14 to less than 1.10.

  • Safe-haven currencies are appreciating. The EUR/JPY has moved from 121 to 111 and the EUR/CHF from 1.09 to below 1.07.

  • Gold is another winner.

  • Further downside for both the Pound Sterling and the euro should be limited, with the possibility of interventions by policymakers at any moment.

The bond market impact

  • Yields are declining substantially on the global bond market, because of a flight to quality.

  • The Sterling bond market is very likely to be downgraded by at least one notch by Standard & Poor’s. Therefore, action taken by foreigners—holding 27% of UK debt—must be monitored closely.

  • Yields will remain lower for longer and shorter-dated bonds are the most sensitive.

  • The Bank of England and other central banks are likely to act to preserve liquidity and might take other measures in due course.

  • Spreads on peripheral bond markets are widening significantly.

  • Emerging market debt will be negatively affected by the strengthening of the US dollar.

  • At this stage, we have no inclination to change any of our investment conclusions.

The equity market impact

  • The return of investors to risk-off mode is leading to a strong knee-jerk decline in prices. Banks are particularly badly hurt due to their sensitivity to the decline in bond yields and to rising macro headwinds.

  • UK stocks, which were up slightly in 2016 until yesterday are falling significantly, firstly to reflect the unknowns about the exit negotiations and, secondly, to price in earnings downgrades and their high valuations. With 70% of sales generated outside the UK, earnings downgrades will be cushioned by gains from transactional and translational effects. Still, their profile is poor by international comparison.

  • Downside risk estimates over the next few days and weeks vary greatly because they will depend on   how  policy makers react, which will include hints about whether the divorce will be amiable or not.

  • European stock markets are also suffering heavily, as they are pricing in a premium for growing uncertainty. However, their earnings and valuation fundamentals should remain above average and, once the dust settles, take over the role of key price driver. Healthcare, telecoms and IT are the best positioned sectors in the medium term.

  • The Japanese stock market is heavily impacted by the continued rise in the yen that derives from its safe haven status. The same reasoning applies to the Swiss stock market. For both these markets, close attention must be paid to any reaction from policymakers intended to cushion the impact of the Brexit vote on currencies.

  • Other developed stock markets are less exposed to the Brexit vote, and therefore, will only suffer for a limited period of time from growing risk aversion.

  • Emerging stock markets will be negatively impacted by the strengthening of the US dollar.

  • Overall, even though markets will be volatile in the near future, their medium-term outlook remains moderately positive in our view.


  • The UK's decision to leave the European Union is a surprise, which is fuelling broad uncertainty and casting doubts over the economic outlook. Therefore, it is causing high volatility which should continue over the next few days.

    Our main scenario remains that the global economy will keep growing, that policymakers will remain extremely vigilant and focused on limiting adverse effects. Hence, it is very important to stay calm and keep current positions. Fundamentals will progressively take over, and consequently, risky assets will resume their upward trend.

  • We will be following the news flow closely over the coming days, which will be decisive especially from a political point of view, and we will communicate accordingly.