Brexit or Bremain, BlackRock expects ‘far-reaching market implications’

Stay, or go? That is the question on the lips of billions around the world on the topic of Brexit – especially with the UK’s June 23 European Union (EU) referendum looming in the weeks ahead, which will determine whether Britain will leave the EU or not.

“The vote outcome is highly uncertain, with global risk assets vulnerable under a British-exit (Brexit) scenario,” says Blackrock’s global chief investment strategist Richard Turnill in a weekly commentary, who views the upcoming referendum as a “major risk for global markets”.

He reiterates last week’s warning of caution to investors, while recommending that investors dial down equity and credit risk for now. “UK investors may want to put in place hedges against a potential Brexit outcome,” he adds.

While BlackRock’s recent analysis has reflected divided opinions on the possibility of a Brexit, one thing is for certain: the economic ramifications, whichever the case, will not be easy.

These are the implications according to Turnill, be it Brexit or Bremain:

  • UK and other European assets set to bear the brunt. The British pound could drop significantly in the event of a “leave” vote, while UK equities, especially domestically-exposed small- and mid-cap stocks, can be expected to decline.
  • Global markets may be shaken up. Other risk assets, including stocks and credit, are likely to suffer in the resulting risk-off environment following a Brexit. This results from higher risk premiums due to concerns about political instability and what Turnill calls a “reversing globalisation trend”.
  • Increased vulnerability beyond EU. BlackRock’s recent stress-test analysis shows that peripheral European assets, as well as the global financials and equities sectors would be “particularly exposed” should Britain leave the EU.
  • Safe-haven investments a good option. Should a Brexit occur, Turnill believes safe-haven investments will be beneficial in facing the risk of political instability amidst uncertainty over the succession to British Prime Minister David Cameron.
  • Bremain has its own consequences. Big changes are ahead even in the event that the UK votes to stay, says Turnill: “We see risk assets rallying, safe-haven assets suffering, the pound getting a boost and market attention turning to the upcoming US presidential election”.

Following Fed Chair Janet Yellen’s comments on Monday, market expectations for a central bank rate increase have plunged.

This week, Turnill recommends looking out for any signs of further stabilisation in China’s foreign exchange reserves, and whether European countries’ production data show similar improvement to that seen in recent surveys.

This article first appeared in The Edge Singapore Market Report.

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