Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Companies most exposed to the UK are getting crushed
Christopher Dembik
Head of Macro Analysis
Summary: The path towards a Brexit resolution remains strikingly unclear, but one thing is certain: firms with high exposure to the UK market are taking it on the chin.
Despite the Kafkaesque political situation in the United Kingdom, the risk of an outright no-deal Brexit is quite low. The extension of the Article 50 deadline, for instance, could provide more time for the British government to find another solution. It could be a new referendum, or even an amended Brexit plan by Parliament. In other words, it is way too early to panic. Brexit is a very irrational decision, but it is unlikely that UK citizens and politicians are ready to commit political hara-kiri (or that European Union leaders would allow it).
There will be agreement, it is only a matter of time.
Limited macro impact but striking market impact
Brexit's macro impact is quite easy to evaluate: lower growth (though still above potential growth), higher inflation due to a lower GBP exchange rate and a lower savings rate as the British had to tap into their savings to cope with the economic slowdown.
On the other hand, assessing the impact of Brexit on companies is trickier. We can try to do so by using data from CBOE Bats (which covers 57 indices across 15 countries, pan-European and Eurozone regions, and Brexit and sector indices) as a benchmark for economic attractiveness and investment.
In the chart below, the blue line represents the 50 companies less exposed in terms of revenue to the UK market (Bats Brexit Low 50) and the red line represents the 50 companies that derive the largest portions of their revenues from the UK (Bats Brexit High 50).
The result is quite striking: Brexit UK risk premium is extremely high.
Since January 1, 2016, the performance of companies dependent on the UK market is negative (-4%) while that of companies least dependent on the UK market is nearly 40%! This gap is likely to remain wide if the Brexit political mess continues, and it can easily be explained by higher uncertainty regarding the UK’s relationship with the EU, negative consumer trends and the decline in the expected future openness of the UK to trade and investment.
All of this is making companies highly dependent on the UK less attractive for most investors, but for risk takers, the discount on stocks linked to Brexit constitutes a strong incentive to come back to this market.
There will be agreement, it is only a matter of time.
Limited macro impact but striking market impact
Brexit's macro impact is quite easy to evaluate: lower growth (though still above potential growth), higher inflation due to a lower GBP exchange rate and a lower savings rate as the British had to tap into their savings to cope with the economic slowdown.
On the other hand, assessing the impact of Brexit on companies is trickier. We can try to do so by using data from CBOE Bats (which covers 57 indices across 15 countries, pan-European and Eurozone regions, and Brexit and sector indices) as a benchmark for economic attractiveness and investment.
In the chart below, the blue line represents the 50 companies less exposed in terms of revenue to the UK market (Bats Brexit Low 50) and the red line represents the 50 companies that derive the largest portions of their revenues from the UK (Bats Brexit High 50).
The result is quite striking: Brexit UK risk premium is extremely high.
Since January 1, 2016, the performance of companies dependent on the UK market is negative (-4%) while that of companies least dependent on the UK market is nearly 40%! This gap is likely to remain wide if the Brexit political mess continues, and it can easily be explained by higher uncertainty regarding the UK’s relationship with the EU, negative consumer trends and the decline in the expected future openness of the UK to trade and investment.
All of this is making companies highly dependent on the UK less attractive for most investors, but for risk takers, the discount on stocks linked to Brexit constitutes a strong incentive to come back to this market.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer