‘Brexometer’ index – institutional investors neutral on holding UK assets

The impact of Brexit on institutional investors’ attitude to holding UK assets is broadly neutral, with 63 per cent expecting to maintain their holdings of UK assets in the coming six months, 16 per cent planning to decrease holdings and 13 per cent who believe they will increase them, State Street’s new Brexit market sentiment index shows.

Brexit Financial Fluctuation, 3D RenderingThe first edition of State Street’s ‘Brexometer Index’, a quarterly pulse survey of institutional investor sentiment towards the UK’s departure from the European Union, finds 43 per cent of investors neutral on their outlook on medium-term global economic growth on the whole, with 33 per cent positive and 19 per cent negative.

The index polled 111 institutional investors from around the world during December 2016 and January 2017. The research will be conducted on a quarterly basis using the same questions and database to measure how sentiment towards Brexit is evolving.

The research found 48 per cent expect the level of investment into the UK economy to fall during the next quarter, down slightly from 52 per cent in identical research carried out three months previously.

31 per cent believe asset owners will decrease levels of investment risk over the next three to five years – up from 26 per cent three months earlier. A quarter – 26 per cent – think asset owners will increase levels of risk.

State Street EMEA CEO Jeff Conway says: “Our findings show that institutional investors expect Brexit to have an impact on a range of operational issues, and subsequently we have seen an increase in clients looking to address this. Many appear well prepared for Brexit and are proactively putting strategies in place to mitigate any ensuing impact.”

State Street Global Markets head of global macro strategy Michael Metcalfe says: “At just over six months removed from the UK’s EU referendum, markets seem to have mostly moved on. Questions over timing of the UK’s ultimate split from the EU and the nature of their future relationship still linger and have the potential to weigh on both the economy and the pound. Nevertheless, thus far at least, the extremely gloomy pre-Brexit predictions for the UK economy and asset markets look well off the mark.

“Although it has not weakened further since October, Sterling remains very weak, with the result that the valuation case for the currency remains and appears to be aiding inflows to UK assets. The recent release of official capital flow data for Q4 2016 shows the UK with few problems attracting the funding needing for its still-large current account deficit. Foreign institutional equity investors are particularly strong buyers of UK equities of late. The outlook for gilts is less positive, not least as online price inflation is already at 3 per cent and rising.”

State Street Global Advisors EMEA head of currency James Binny says: “Sterling weakened sharply following the vote and fell sharply again in October. However, it has been more stable since. The weakness benefitted UK based clients who were not hedged. However, we have seen increased hedges from existing currency overlay clients – both into passive and more dynamic approaches – as well as more enquiries from clients who haven’t managed currency before. For some this is simply driven by a desire to reduce risk when other asset return expectations are lower, but also UK based investors who have gained from Sterling weakness and so are seeking to lock in those profits.”