27th June 2016
The Brexit result caught us, financial markets, pollsters and odds-makers by surprise.
We believe the 1.3 million vote win to Leave is comprehensive enough to ensure politicians (who overwhelmingly supported Remain) feel compelled to implement Brexit.
Brexit will be a messy Break-up. The UK will want to maximise strong trade access to Europe while regaining control of regulation and the movement of people. Core Europe will want to make Brexit a painful process for the simple reason that it might serve as a deterrent to others. If the EU allows Exit to be a quick, clean, potentially prosperous route, then the European Union will be over.
The outcome of the referendum substantially changes the macroeconomic backdrop for the UK and Europe. We expect a significant reduction in UK growth and the pound, along with weaker Eurozone growth. This should elicit easing from the Bank of England, and keep the ECB on its toes for some time. We see the timing of the next US rate hike being pushed out.
Brexit is a significant shift in the geopolitical landscape, with an associated step-shift in uncertainty. Investors will need compensation for this with lower share prices. We believe a 15% global equity sell-off over the next 6-8 weeks is a reasonable base case. That said, Brexit, is not, in our view, the start of another Global Financial Crisis.
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