A no-deal Brexit could lead to almost a 25 per cent fall in the value of UK equities, with European stocks falling by 10 per cent, according to MSCI.
MSCI says a disruptive Brexit with less severe assumptions could lead to losses about a third as large.
Analysing the way key economic and market indicators have fared since the Brexit referendum in June 2016, MSCI says quarterly year-on-year UK GDP growth rose at first, but has been declining since mid-2017. After a sharp initial reaction to the outcome of the referendum, the UK equity market and, to a lesser extent, the pound, recovered, but started to slide again at the beginning of 2018. Since the referendum, the pound has lost 7 per cent relative to a trade-weighted basket of currencies, the UK long-term yield is slightly lower than it was in June 2016 and UK equities have risen by 8 per cent in GBP terms, in contrast to the MSCI World index which gained twice as much in local currency terms.
MSCI’s ‘No deal Brexit scenario’, designed in 2017, assumed UK GDP growth would decrease by 9 per cent, the pound weaken 16 per cent against the US dollar and the euro and the UK 10-year sovereign yield would increase by 20 basis points. Its latest analysis, which slightly modifies that original scenario to bring it in line with the main assumptions of the two BoE scenarios, predicts equity markets lose across the board under all three scenarios, with the worst-case 23 per cent drop in the United Kingdom twice as large as in other countries.
An MSCI spokesperson says: “The U.K. has underperformed other regions in terms of GDP growth, as well as in the equity and currency markets. However, the real impact – if there is “no deal” – has yet to materialize. Various scenarios we tested suggest a significant slowdown in the UK economy and large losses in its equity markets and exchange rate. Investors should continue to watch closely while preparing themselves for the worst.”