With the rising probability of a UK general election being held in the near future, the possibility of a no-deal Brexit and its impact on markets is on the minds of many. In the event of an election, we take a look at two probable scenarios and their wider ramifications.
Scenario one: Prime Minister Johnson prevails
According to London-based Shamik Dhar, BNY Mellon Investment Management chief economist, if Boris Johnson’s Conservative Party gains a healthy majority, or even a significant majority, the chances of no-deal Brexit by October 31, 2019 go up. Here’s what he expects would happen:
- Sterling will fall.
- The FTSE 100 index may fare slightly better than the FTSE 250. (This is due to a greater proportion of companies in the blue chip index having international earning streams.)
- Gilts1 will probably rally, as the prospect of interest rate cuts from the Bank of England’s Monetary Policy Committee begin to get factored in.
From New York, BNY Mellon Investment Management’s chief strategist, Alicia Levine, adds: “A hard or no-deal Brexit would in all likelihood have a greater impact on global markets as markets continue to price in a negotiated Brexit. A hard Brexit would, on the margin, lead to weakness in Europe, with the UK second only to Germany in economic strength. There would be further pressure on global yields, including those in the US. Sterling weakness would be another factor putting a floor under the US dollar.”
On the other hand, Dhar says, if some combination of what is being termed the ‘Remain Alliance’ forms a government – off the back of enough combined seats in the UK House of Commons – he expects a lower likelihood of a no-deal Brexit. As a result, he predicts there would:
Scenario two: ‘Remain Alliance’ forms government
On the other hand, Dhar says, if some combination of what is being termed the ‘Remain Alliance’ forms a government – off the back of enough combined seats in the UK House of Commons – he expects a lower likelihood of a no-deal Brexit. As a result, he predicts:
- There will be more volatility in Sterling.
- The FTSE 100 index will likely do worse than the FTSE 250.
- Gilts could stabilize.
Levine adds: “A negotiated Brexit would, on the margin, be neutral to global markets and currency markets, as this is the base case scenario the market is currently pricing in. We expect an easy monetary policy stance from the Bank of England in either case, pressuring global yields, although to a lesser extent in a soft Brexit scenario. In the eventuality of the UK remaining in the European Union we would expect a positive impact on global markets due to reduced disruption.”
1Gilts is the term used to refer to UK government bonds
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Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees. Currencies are subject to the risk that those currencies will decline in value relative to a local currency, or, in the case of hedged positions, the local currency will decline relative to the currency being hedged. These risks may increase fund volatility. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries.
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