How do you capture the true impact of Brexit on the UK?

The colloquially popular ‘Brexit’ referendum introduced the UK to unprecedented uncertainty. This uncertainty always creates binary outcomes in terms of winners and losers when it comes to financial markets which are inherently tied to sentiments and speculations. It is important for investors to be able to gauge the impact of Brexit on their investment and capture the inherent risk – a task much easier said then done.

If we look at the impact itself, there are several contributing factors to this complex and widely spread impact including volatility (both actual and implied), conflicting news and research, too many moving parts, interdependence of those factors and political influence. This complexity makes many statistical models either rigid or inconsequential. But portfolio managers and skilled researchers would very much like to capture the holistic impact of Brexit in rather simplistic ways than to delve into complex models and individual factors. Perhaps some kind of a basket representing all those underlying contributing factors. Perhaps a stock index that brings together all impacted firms.

Let’s look further.

It’s the economy, stupid

Bill Clinton used this phrase to point to the fact that economy is composite of all things and affects us all. The same is true with Brexit. It is not a sector anomaly or contained in its impact to a sector or two. It will affect everyone in the UK through changes in prices of raw material, migration of talent, degree of trade and flow of goods. The uncertainty created by Brexit has already resulted in slowdown with just 1.3% growth in UK’s GDP in 2018. The house prices in the UK have experienced the slowest growth in past 6 years, 0.1 percent growth in January 2019. Property market jitters are most visible in the south of UK, especially in London. With such a large impact, it is a dire need to have a robust indicator that can capture the pulse of Brexit, i.e., it’s on-going impact in a holistic way.

 

Dear or No Deal?

The perils of a probable Brexit Nothing is set in stone yet. In this hyper-fluid political reality, experts are trying to best judge the impact of a Brexit across its range of flavours (soft, hard, no-deal and none). Businesses are preparing contingencies for all the scenarios, which is an expensive exercise to undertake. Financial sector alone could see £1 trillion assets moving out the UK to Europe. EY also estimates that around 7000 high-paid finance jobs will move out the UK in case of a no-deal Brexit. Beyond the financial sector. The Bank of England estimates show that the economy could be pushed into a recession as a result of a no-deal Brexit, with the GDP suffering a long-term impact of close to -10%.

 

Oktoberfest or Halloween

The extension till October end for Brexit has been met with mixed feelings. While the delay provides a reprieve for financial markets for now, it prolongs the over uncertainty that exists in the market. Christine Lagarde, IMF, had warned that an extension could have a ‘negative impact’ because the prolonged uncertainty.

To fathom such unfathomable phenomenon, we refer back to the need of a stock index that brings it all together, a true Brexit index of sorts. We will look at what is available in the market in our next blog and evaluate them. Stay tuned.

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