State Street Quarterly Brexometer Index Reveals Latest Investor Sentiment towards Brexit

State Street Corporation today launched the latest findings from its Brexometer Index, a quarterly pulse survey of institutional investor sentiment about the UK’s departure from the European Union.

The Q3 2017 survey1 indicates a gradual rise in confidence, with 45 percent of respondents expecting positive global economic growth in the near-medium term (three to five years); a 13 percent increase since Q4 20162.

In addition, 33 percent believe asset owners will increase their level of investment risk over the next three to five years, a seven percent rise since Q4 2016. There has also been a modest increase in appetite for UK assets with 16 percent planning to gain a greater exposure over the next six months, a three percent rise since Q1 20173.

Outside of this, whilst the majority (72 percent) feel Brexit will impact their business, this figure is down by seven percent versus Q2 20174.

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 percent to 16 percent, but the share suggesting they would reduce their holdings also rose by 2 percent to 20 percent.

“Importantly, the balance is still positive; more investors still plan to increase their holdings of UK assets, there is still no evidence of capital flight from UK assets. But 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.”

Bill Street, head of investments for EMEA at State Street Global Advisors commented, “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.”