How Brexit could impact institutional portfolios

April, 2017 Print

The impact of Brexit on typical institutional investors’ portfolios could vary widely, depending on the nature of the deal reached by the UK and the European Union (EU). This is the conclusion of analysis by research and index provider MSCI, which looked at three possible scenarios, ranging from a smooth Brexit, with trade deals negotiated by the UK, to a rough Brexit, with no deals made within the two-year time period before the UK falls out of the UK, and a scenario where populist, anti-EU parties gain power in Europe, making the UK appear to be a safe haven.

If there is a rough Brexit, MSCI vice president, risk and regulation research, Thomas Verbraken, commented: “In our scenario, the pound weakens 16% against the dollar and the euro. Equity markets in the UK and EU fall by 37% and 21% respectively.” Verbraken said that a globally diversified, multi-asset portfolio could lose up to 7.8% in this cases, with equity portfolios losing 11% on average and fixed income portfolios losing 2.8% on average.

In the case of a smooth Brexit, Verbraken said UK equities could lose 12% but there would be less impact on a diversified, multi-asset portfolio, which could lose 1.6%, while European equities fall by 4%. If Brexit works to the UK’s advantage, if the EU looks like breaking up, then the pound could rise by 16% against the dollar, with UK equities gaining 4.2% and European equities falling by 11%. In this scenario, a diversified, multi-asset portfolio could gain 3.5% in value.

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