The UK equity market is likely to plunge and the pound could lose 10% of its value if the UK leaves the EU without a trade deal at the end of October, a report warns.
Exiting the EU without a trade deal could be costly for the UK economy, which has already seen the pound fall by 17% since the referendum. In the event of a no deal scenario, UK stock markets could fall by a further 15% and have negative repercussions across European stock markets, MSCI warns.
While UK stocks might recover some of these losses, interest rates for 10-year gilts could fall by 30bsp and UK credit spreads could widen by 40% in the event of a no deal.
But the index provider also predicts that stock markets could rebound by 10% and the value of the pound rise by 8% if a last-minute deal was struck.
This tallies with earlier warnings by the Institute for Fiscal Studies, which predicts that economic growth in the UK would remain more or less stagnant for the next three years, if the UK leaves without a deal. The scenario is based on the assumption that the UK would have a stable government throughout that period and no part of the UK leaves the union.
For institutional investors, the immediate effects of a no-deal Brexit are likely to be mitigated by the fact that most have already factored the geopolitical risks into their asset allocation. By the middle of this year, the average UK equity exposure for UK defined benefit (DB) schemes was a modest 6%, compared to 15% invested in international equities, according to Mercer’s Asset Allocation Survey.