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All that financial experts say about Brexit
Four months of nervousness that dominated all the attention. Against expectations, the Brexit won and now will begin negotiations for farewell to the European Union. But the impact on markets was felt soon and experts are on the alert. Investment banks and asset managers are informing customers of the referendum effects on the economy and markets. So get to know everything the experts say about Brexit.
ALLIANZ GLOBAL INVESTORS – “Investors should prepare for extreme drops” every bad news
Economy: “The uncertainty cast by an impending British exit will have its impact on economic activity in the United Kingdom and the European Union,” says Allianz Global Investors. Indeed, there is evidence that the run-up to the vote was already having an impact in the UK, with some inward investment decisions being put on ice. The asset manager adds that “the Bank of England expects a technical recession but will stand ready to offset any significant financial dislocations.”
Markets: “The effect of Brexit in the markets is already evident and more significant in the United Kingdom assets,” notes Allianz Global Investors. With an eye on stock markets, the management points out that “some listed companies in the UK will develop reasonably well in this environment,” but not those that have a large dependence of the pound. And adds that “what is bad for the shares is usually bad for the credit.”
“While the immediate down-draught in UK asset prices may subside after a week or two, investors should prepare for extreme drops whenever unfavorable economic data, or when political developments take their course”. Elsewhere in Europe, “we expect to see some spread-widening in the bond market, especially among those issuers on the periphery that are seen as more vulnerable to contagion from the Brexit vote”.
BLACKROCK: “Indiscriminate sale could result in opportunities”
Economy: “The important decision of the UK to leave the European Union brings lasting economic and political consequences,” says BlackRock. The asset management experts anticipate that “the potential losses in the export of services and investment flows will overlap the lower payments to the European Union.” Concerning the negotiations, those responsible in Brussels should take a “harsh tone against the United Kingdom”.
But the UK will have much to do and then the focus is on the Bank of England. “The first priority will be to provide ample liquidity to avoid any funding stresses. We expect the central bank to cut its 0.5% policy interest rate to zero soon, and see it returning to quantitative easing rather than pushing rates into negative territory”.
Markets: “We anticipate a weak euro over time and pressure on European equities, credit and on the peripheral bonds”. And even anticipates that Brexit “will lead to declines in global equities and other risk assets. Still, the indiscriminate selling could result in opportunities.” In the UK, the expectation of BlackRock is that “the fall of the currency benefit large companies with profits abroad, while domestic sectors such as homebuilders, retail and financial, seem vulnerable.”
FIDELITY – “ECB may increase purchases of assets”
Economy: “European companies with significant exposure to the UK may cut investment until the uncertainty about the British commitment to the European Union alleviate”. The asset manager note that trade relations will be harmed and stresses that “if the adverse economic impact is significant, the ECB will probably expand asset purchases, reducing the risk of a worse economic reversal than anticipated.”
Markets: “Negative pressure in the stocks of UK, especially in the financial sector and those which are more dependent on migrants from the European Union”, such as construction and housing, predicts Fidelity. For most asset manager in Europe, “the pressure will be lower in UK companies that have higher foreign exchange gains”, foreseeing the continuous devaluation of the pound.
But Fidelity also points to a rise in British interest payments due to the high risk and the higher inflation outlook. On the other hand, “modest fall in UK house prices are possible due to reduced confidence of buyers and a possible increase in unemployment.”
GOLDMAN SACHS – “macroeconomic forecasts are now under review”
Economy: “The single biggest risk to Europe this year – that the United Kingdom would vote to leave the EU – crystallized” shoots Goldman Sachs. The US investment bank points out that the decision “reduces the growth prospects for the UK and Europe at a time of high uncertainty”. And adds that, “formally, our macroeconomic forecasts are under review.”
Markets: In the markets, “the higher exchange rate volatility is likely to continue”. The expectation of Goldman Sachs is the mass risk evasion, which shall benefit the dollar, while the pound and euro devalue. Refuge will also be the Swiss franc and the yen. But the problems do not stop there. “The growing conviction of the markets, is that the UK would vote to stay in the US, should fuse an immediate change to [safer debt securities]”.
This move will bring “the interest of European bonds of ‘core’ countries to retreat and risk premium to rise from the periphery”. In the equity segment, “while the central banks act quickly to keep the market functioning, we believe that the implications for the market will be enormous, widespread and fast.”