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What do investors really think about Brexit?

FE Trustnet takes a look at State Street’s quarterly Brexometer Index survey, which found that 72 per cent of institutional investors believe Brexit will impact their businesses.

Lauren Mason

By Lauren Mason, Senior reporter, FE Tru...
Thursday July 13, 2017

Some 72 per cent of institutional investors believe Brexit will impact their businesses, according to the latest Brexometer Index survey from State Street, which also found that only half of investors expect their UK equity allocation to remain the same over the next six months.

The latest quarterly research, which was conducted between 20 June and 4 July 2017, found views regarding Brexit and holding UK assets to be highly polarised among those surveyed. 

That said, sentiment surrounding Brexit-related uncertainty appears to have improved compared to their findings from previous quarters. For instance, one-third of participants believe asset owners will increase the risk levels of their portfolios over the next three-to-five years, which is a 7 per cent increase compared to Q4 last year.

Michael Metcalfe, head of global macro strategy at State Street Global Markets, said: “March 2019 is a quarter closer, but neither the UK election nor the beginning of Brexit negotiations have narrowed down what is likely to happen.

“If anything the possible outcomes have widened not narrowed. The loss of a Conservative majority in parliament and the need to partner with the Democratic Unionist Party (DUP) has raised hopes of a softer version of Brexit, but at the same time raised the possibility of political deadlock or no deal.

“This wider range of possibilities certainly appears to have impacted our survey this quarter, the share of respondents suggesting they would increase their exposure to UK financial assets increased by 3 per cent to 16 per cent, but the share suggesting they would reduce their holdings also rose by 2 per cent to 20 per cent.”

However, he pointed out that the balance is positive compared to previous surveys and that there is still no evidence of capital flight from UK assets.

“It is testimony to the continued level of uncertainty over Brexit that the opinion amongst these respondents is getting more divided not less as the deadline nears,” Metcalfe added.

Since the shock ‘Leave’ result was announced on 23 June last year, the subsequent plummet in sterling has boosted the global-facing FTSE 100 index’s returns.

While the upwards trajectory of the index may initially suggest investors are bullish on UK equities, this is not necessarily the case.

Performance of index since 23 June

 

Source: FE Analytics

Not only does 75 per cent of the FTSE derive its earnings from overseas – thus making it an inaccurate representation of sentiment towards the domestic economy – many investors feel as though they have been pushed into risk assets due to ultra-low interest rates and bond yields in what has been dubbed by some as the ‘most hated bull market yet’.


In fact, in recent update by consultancy Capital Economics questioned whether the economy is finally succumbing to Brexit worries.

It referred to the latest “disappointing” data on industrial production and construction, which it said will make a substantial GDP growth rebound in Q2 difficult to achieve.

“Admittedly, the all-sector PMI still points to quarterly growth of around 0.5 per cent. But on the basis of the hard data, even growth of 0.4 per cent would require a monthly rebound in growth in June,” noted UK economist Paul Hollingsworth.

The economist said recent figures released by the Society of Motor Manufacturers and Traders had revealed fairly subdued growth in car registrations, as well as weaker investment by car manufacturers, during the first half of 2017 compared with 2016.

However, Hollingsworth pointed out that non-Brexit related factors were also probably at play, with the signing of a free-trade deal between the EU and Japan this week creating further implications for car manufacturers.

State Street’s findings also echo this sense of confusion and uncertainty when it comes Brexit concerns. Since the firm’s Q2 survey, the number of institutional investors expecting their UK equity allocation to remain the same has fallen by 11 per cent to 53 per cent in total, while more than 10 per cent of investors don’t know how their holdings will change. This is a 4 per cent increase since the last survey.

 

Source: State Street Corporation

A third of respondents also expected asset owners to increase their levels of risk over the next three to five years, while 36 per cent expected asset owners to de-risk their portfolios.


Amid the uncertainty, however, the survey showed a gradual rise in confidence. While 72 per cent of participants believed Brexit will impact their business operating models, the proportion that didn’t believe this to be the case reached its highest level since the Brexometer Index began, having risen from 21 per cent to 24 per cent over the last quarter.

The number of respondents who expected Brexit to have a “significant” impact on their business fell to 17 per cent. While this is lower than the high of 19 per cent recorded in the last financial quarter, it is still significantly higher than the 12 per cent of participants recorded in Q1 this year and Q4 last year.

Bill Street, head of investments for EMEA at State Street Global Advisors, said: “Policy uncertainty will likely remain elevated due to political shifts globally. In fact, the Global Economic Policy Uncertainty Index is higher than during the global financial crisis and Brexit remains a significant source of this uncertainty following the UK’s hung parliament vote in June.

“Turning to sterling specifically, the market seems content that a level of 1.18–1.22 reflects an appropriate discount to reflect Brexit risk. However, near the top of the recent 1.22–1.30 range the prospects for sterling appear biased lower.

“UK manufacturing production and retail sales have been consistently weaker in 2017 and we expect the first six months of direct negotiations with the European Union to be contentious, suggesting a lower currency. Any move higher will likely be delayed until there is greater clarity.”


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