State Street Quarterly Brexometer Index Reveals Latest Investor Sentiment Towards Brexit

State Street Corporation (NYSE: STT) today launched the latest findings from its Brexometer Index, a quarterly pulse survey of institutional investor sentiment on the economic impact of Brexit.

After appetite for UK assets rose to a record high in Q3 2018[1], the Q4 2018 survey[2] has brought a slightly more muted response from investors, with those intending to increase their holdings falling to 15 percent from 21 percent. Consequently, the proportion of investors looking to decrease their holdings of UK assets remained unchanged at 20 percent in Q4.

“This quarter’s Brexometer was conducted in the first week of November, a period when, in theory, hopes of a deal were on the rise,” said Michael Metcalfe, head of Global Macro Strategy at State Street Global Markets. “Given that context, it is telling that there was little shift in investor attitudes toward their UK asset holdings. Such caution has been vindicated as November has progressed and while significant Brexit hurdles have been cleared, the UK parliamentary vote, which is perhaps the largest challenge to agreeing the deal, now looms large.”

In addition, despite a more optimistic outlook for the medium-term global economy in Q3, when investor sentiment had risen to 43 percent, the number of those holding a negative outlook has now doubled, from 15 percent to 30 percent. This is the highest negative reading since the study began and seven percent higher than the previous record of 23 percent in Q2 2018[3].

The Q4 survey also found that while 80 percent of investors anticipate Brexit having an impact on their operating model, the proportion of those expecting it to have a significant impact fell from 26 percent in Q3 to 18 percent.

Other key findings of the Q4 2018 index include:

• 28% of institutional investors believe asset owners will increase their level of investment risk over the coming three to five years. Yet the number anticipating a decrease rose to 43%, the highest proportion since the survey began in Q3 2016[4]
• The proportion of investors stating that they would not need any investment services support rose sharply in Q4, from 28% to 39%. But regulatory reporting issues, such as those required under Solvency II and AIFMD, remain the most in-need service (28%)
• More than a third (38%) of institutional investors believe their company will use more cross-border fund locations, with Ireland (45%), Luxembourg (38%) and Germany (24%) listed as the most attractive for managers

“Despite the political theatre and the potential tail risk of a disruptive Brexit, we believe that the chances of the UK entering a multi-year transition period in 2019 remains high,” said Bill Street, head of investments for EMEA at State Street Global Advisors. “Similar to conventional electoral dynamics, there is a quasi-incumbency advantage to approving the current draft agreement, given the absence of a plausible alternative. An eventual agreement on the withdrawal should therefore deliver a sentiment boost to UK assets as well as free-up investment in the real economy that is currently held back due to uncertainty.

“Movements in Sterling will continue to be dominated by Brexit news. It remains considerably undervalued reflecting future uncertainties, rallying on news of more positive negotiations before falling back whenever the risks of “no deal” appear higher,” continued Street. 

View the full Brexit research report to understand its economic impact.