How Brexit may impact your portfolio
Although the consequences of the decision by U.K. voters to leave the European Union will unfold over time, one certainty is that institutional investors around the world will be analyzing the outcome to determine what it may mean for their portfolios and businesses.
MSCI has created a range of resources that bring investors insights and analytical tools to help them assess the effects of Brexit and its aftermath on markets, asset classes, investment strategies and the economy. Here is a rundown.
Why Brexit and Economic Exposure Matters
The performance of markets post-Brexit highlights the importance of capturing how companies across different industries are exposed to economic activity beyond their domestic borders.
Understanding geographic distribution of company revenues could enhance the investment decision processes for constructing and managing global portfolios. Investors should also consider how tilting their portfolios towards stocks with higher international or domestic exposure, could impact their investments.
What Brexit may mean for London’s office market
Though Brexit has roiled funds that invest in U.K. real estate, properties at risk of tenants moving workers to the EU represent a relatively modest share of the market for commercial property in the U.K., data from MSCI shows. Sebastien Lieblich, MSCI’s global head of real estate research, examines the exposures for investors.
Fallout from Brexit matching MSCI’s scenarios
The U.K.’s decision to leave the European Union reverberated across financial markets in roughly ways that MSCI has anticipated. Changes in bond yields and equity returns within the first day of trading following the vote fell within the range of two possible outcomes modeled last March by MSCI. Thomas Verbraken of MSCI’s risk research group reviews both scenarios in a webinar convened on June 27. Listen to the webinar here.
- Brexit and the benefits of minimum volatility strategies - MSCI’s Minimum Volatility Index, which aims to protect investors from risk to the downside, outperformed in the aftermath of Brexit as it has throughout episodes of market turmoil over the past 17 years. Dimitris Melas, MSCI’s head of global equity research, breaks down why.
- The risk of capitalism without inclusiveness - Brexit shines a light on fissures between perceived winners and losers from globalized markets and highlights for investors the importance of factoring the consequences of inequality and popular discontent into their view of risk, writes Linda-Eling Lee, global head of MSCI ESG Research, in her latest blog post, which discusses how undercurrents from a tide of populist sentiment can influence asset prices over the longer term.
- Brexit and the U.K. real estate market - The vote on Brexit signals turbulence for investors in U.K. real estate, according to Sebastien Lieblich, MSCI’s global head of real estate research, who assesses the uncertainty through the lenses of geography, property type, and domicile and type of investor.
- Which scenario after Brexit? - Populism is likely to continue intensifying pressures on portfolios, but stress testing its effects presents challenges. Remy Briand, global head of research, discusses some of the reasons why Brexit may be only the beginning and summarizes steps that investors can use to model the impacts of similar events.
- Viewing Brexit through the lens of risk dynamics and economic exposures - Brexit has unsettled global markets and upped systemic risk for the U.K. compared with developed economies generally. "The question now is whether the waves will continue, and how they may or may not intensify," writes Dimitris Melas, MSCI’s head of global equity research, in this analysis, which examines financial fallout in the run-up to the referendum. “The only known right now may be that the uncertainty surrounding Brexit is likely to endure,” he adds. “Analysis of economic exposures and risk dynamics may help investors sort through it.”
- ‘Good’ Brexit, ‘Bad’ Brexit - MSCI has examined two scenarios for Brexit: one in which the U.K. leaves the EU, trade barriers go up for Britain and little else happens, and another in which the U.K.'s leaving breaks up the eurozone
Brexit with limited spillover
A global, diversified multi-asset class portfolio could lose 1.8%. Stocks retreat 10% in the U.K., 5% in Germany, 2% in France and barely at all in the U.S. and Asia. The yield on 10-year U.K. government bonds contracts 30 basis points (bps). The pound loses nearly 2.8% against the dollar, 3.2% against the yen and 2.9% versus the euro.
Brexit with contagion
In a bad scenario, the globally diversified portfolio described above could shed 7.3% of its value. U.K. stocks fall 22%, and equities tumble 21% in Spain, 18% in the Netherlands, 17% in Italy, 15% in France, 14% in Germany, 13% in the U.S. and 5% in Japan. Yields on 10-year government bonds shrink 70 bps in the U.K., 60 bps in the eurozone and 50 bps in the U.S. The pound loses 1.1% against the dollar, 6.3% against the yen and 0.2% against the euro.
This cheat sheet details the effects of both scenarios on equities, sovereign debt and high-yield bonds by country and sector.
- Modern Index Strategy: Why Brexit and Economic Exposure Matters - The performance of markets post-Brexit highlights the importance of capturing how companies across different industries are exposed to economic activity beyond their domestic borders.
- Brexit - What May Be Next For Your Portfolio? - View the recorded webinar that examines several outcomes for Brexit and their possible impact on multi-asset class portfolios.
- Q&A: Brexit - What May Be Next For Your Portfolio? - Q&A session with Carlo Acerbi, Executive Director and Thomas Verbraken, Vice President in MSCI's Risk and Regulation Research team.
- MSCI clients weigh in on Brexit - Institutional investors in the U.K. and Europe fear fallout from Brexit but only a minority are preparing for one, a survey of financial managers and institutions by MSCI shows.