Brexit: A Pandora’s Box of Political Uncertainties Across Europe

AXA IM | No changes to our asset allocation: Given the prevailing uncertainty we confirm our prudent strategy with an underweight in equities but reiterate our positive view on credit. We also repeat our recommendation to hedge the risk of a possible Brexit. The immediate impact on risk assets would be significant, although less so than during the financial crisis episode. Moreover, we cannot exclude a longer lasting negative feedback between markets, economies and political developments in Europe.

We expect the UK to vote ‘Remain’, which would spark a short-lived relief rally and push Gilt yields higher. Rich stock market valuations should limit the upside potential.

The referendum has opened a Pandora’s Box of political uncertainties in Europe, ranging from balkanisation to deeper integration. We are sticking to our 2.8% global growth forecast in 2016. Yet growth remains fragile. Manufacturing fatigue in the US is offset by a slight acceleration in the euro area and Japan.

As expected, all the major central banks have opted for inaction, given economic and political uncertainties. In case of Brexit, we expect a coordinated injection of liquidity to assuage market turbulences. If ‘Remain’ wins, monetary policy divergences are likely to resurface with the prospect of a Fed hike in July. The ECB will most likely announce an extension of its purchase programmes in September as inflation will remain muted. The BoJ is expected to implement additional QQE in the course of the autumn.

*Image: Flickr/Rareclass