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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.
Definitions: FTSE 100 index – The Financial Times Stock Exchange 100 is a capitalization-weighted index consisting of the 100 largest companies listed on the London Stock Exchange. FTSE 200 index – The Financial Times Stock Exchange 250 is a capitalization-weighted index consisting of the 101st to the 350th largest companies listed on the London Stock Exchange. Views expressed are those of the authors stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. BNY Mellon Investment Management and BNY Mellon Securities Corporation are subsidiaries of BNY Mellon. ©2019 BNY Mellon Securities Corporation, distributor, 240 Greenwich St., New York, NY 10286.