Year of the Pig: Can Brexit shock global markets?
At the beginning of every Chinese New Year, AsianInvestor makes 10 predictions about the economic, political and financial developments that are likely to have an impact on the way institutional investors assign their money.
Our latest Year of the Pig outlook considers the potential effect on markets of the UK's looming departure from the European Union.
Will Brexit have a major impact on global or Asian markets?
With just over six weeks to go until Britain’s slated departure from Europe, the negative impact of the Brexit decision on the UK is clear – admittedly exacerbated by the acute uncertainty over the eventual outcome.
The UK economy is steadily slowing. It emerged on Monday (February 11) that 2018, with four straight quarters of falling business investment, saw the lowest annual growth rate of the economy since 2009, according to the Office of National Statistics.
Confidence is slumping amid increasingly dire warnings from business leaders and politicians globally. And a growing number of companies, including British ones, are making contingency plans in case of a no-deal Brexit.
Meanwhile, sterling is trading around 1.28 to the dollar, down from 1.47 on June 22, 2016. UK stocks have gained 17% since the same date, but have underperformed global equities.
Of course, the UK was always going to the country most heavily affected by the decision.
But it is far trickier to predict how much of an effect it could have on financial markets around the world.
AsianInvestor’s research and discussions with investors suggests that even a no-deal Brexit – which would be the most disruptive outcome – is widely expected to have minimal impact on international equity, fixed income and currency markets.
The macroeconomic linkages between the UK and the rest of the world are relatively small – especially in respect of Asia and the US. The further markets are from the epicentre of the shock, the smaller the effect and the quicker it will fade. Moreover, investors have already had quite a while to price in any impact.
That said, the Brexit deadline is not coming at a great time for the global economy. Negative sentiment could certainly spark some volatility in equities and currencies, especially given the bleak and jittery investment outlook.
Six in 10 asset managers think growth in world GDP will weaken over the next 12 months, according to the latest (mid-January) edition of Bank of America Lynch’s closely watched monthly fund manager survey.
That is the worst outlook since July 2008, and a shock from the UK could conceivably make a bad situation worse.
Ultimately, though, issues such as a China slowdown and a Sino-US trade war are far higher than Brexit on the radar of asset allocators in Shanghai, Singapore or Sydney.
Most seem keener to profit from potentially undervalued UK assets – witness the unrelenting flow of Asian capital into London property – than to worry about any potential no-deal ripple effect.
Let us all hope such confidence is not misplaced.
Previous Year of the Pig predictions:
Will asset owners take ESG seriously?
Will the ETF Connect finally open?
How much will Asian asset owners increase alternative asset allocations (on average)?