Analysts weigh in on Brexit

Here’s what the big banks were saying…

Morgan Stanley: The UK’s decision to leave the European Union will lead to profound and protracted policy and economic uncertainty. This in turn will lead to a weaker pound, pushing inflation up and denting growth. First it will hit sterling, as uncertainty reduces non-residents' appetite for UK assets against the background of the UK's record current account deficit. Second, it will hit growth, as firms hold back on investment, and households increase precautionary savings. Longer term, we expect a less open and more volatile economy, with reduced inflows of capital and labour, and a lower rate of potential growth.

Exane BNP Paribas: European equities could fall 10% to 15% in the next few days and recession by the end of this year is the base case. Financial markets will likely react in an aggressive manner this morning and the world has changed, but from a market perspective this is not a systemic Lehman moment. It is politics where the main uncertainty now lies, with central bank response also important. European financials and UK cyclicals will take the initial hit, while risk aversion and US dollar strength will hurt commodity and emerging-market plays. The pound will stabilise in the medium-term at a level 10% below pre-referendum levels. This would imply GBPUSD around 1.35 and EURGBP close to 0.85.

Berenberg: We now expect the UK to almost stagnate for the remainder of this year, with a serious risk of recession instead. We cut our GDP growth forecasts for 2016 from 1.9% to 1.5% and for 2017 from 2.1% to 1.4%. We expect growth in the Eurozone to slow to half its trend rate of 1.6% annualised gains for the remainder of this year before returning to trend in early 2017. That reduces our GDP calls for the region from 1.6% in 2016 and 2017 to 1.4% for both years. But as long as the EU does not fracture much further, a Brexit will not hurt trend growth. Modest losses from less trade with a less dynamic UK will be offset by the relocation of some jobs from the UK into the EU.

Goldman Sachs: The decision lowers the growth outlook for the UK and Europe amid heightened policy uncertainty and threatens tighter financial conditions. We expect central banks, including the BoE, to stand behind markets and support market functioning. Formally, our European macro forecasts are now under review. A further rise in the ERP by an amount typical of previous major risk episodes would lower SXXP to c.280 and SX5E to 2400 – falls of around 19% and 21% in the near term from yesterday’s close. We expect UK domestic equities and the FTSE 250 to be most hit. While central banks will act quickly to maintain market functioning, we judge the likely implications for market pricing to be large, broad-based and rapid.

Societe Generale: There will be pressure on the United Kingdom as Scotland reacts. Initially the Bank of England will focus on liquidity and the stability of the financial system but in due course, monetary policy is likely to be eased too. We continue to look for GBP/USD to trade in a 1.30-1.35 range for now (i.e. a little lower than here) and eventually, towards 1.20-1.25. EUR/GBP will rise further and indeed has already risen faster than our initial estimates, but we don’t expect a move to 0.90 (from 0.83 now).

Barclays: The risk to global growth and multi-decade high profit shares is significant, and as a result, so is the threat to risky asset prices. We expect the current sell-off in risk assets to extend for some time as we believe there are significant markets segments that were either ill-prepared for the breadth of the vote’s impact, or were unable to hedge for institutional reasons. We recommend a defensive posture across asset classes: quality over value in equity and credit, long G4 duration (particularly US Treasuries), short periphery debt, underweight EM and commodities, and long JPY and USD versus all European currencies. We expect an ad hoc G7 meeting this weekend, likely to result in a statement reaffirming the solid fundamentals of major economies and warning against “non-fundamental” exchange rate movements. There also is a good chance of concerted purchases of GBP sometime next week.

HSBC: Given heightened economic and political uncertainty, we cut our UK GDP forecast to 1.5% (from 1.8%) for 2016 and to 0.7% (from 2.1%) for 2017. Our currency strategists expect sterling to fall further. Largely due to currency depreciation, we now expect the CPI inflation rate to end- 2016 at 1.5% and end-2017 at 4.0% (compared with 0.8% and 1.7% previously). In this stagflationary economic environment, we expect UK policy rates to be on hold until at least end-2017. The referendum result means the BoE may come under pressure to offer support to the economy. Although it will be ready to support dislocated markets over the coming days, it may decide a swift rate cut is the correct response. But our view is that a more prudent response would be to let any initial panic subside and make a more considered assessment, before taking rates lower