The number of investors intending to increase their holdings of UK assets has fallen to 15 per cent for Q4 from a record high of 21 per cent in the previous quarter, according to State Street Corporation’s latest Brexometer Index.
Consequently, the proportion of investors looking to decrease their holdings of UK assets remained unchanged at 20 per cent 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,” says Michael Metcalfe (pictured), 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 per cent, the number of those holding a negative outlook has now doubled, from 15 per cent to 30 per cent. This is the highest negative reading since the study began and seven per cent higher than the previous record of 23 per cent in Q2 2018.
The Q4 survey also found that while 80 per cent 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 per cent in Q3 to 18 per cent.
Some 28 per cent 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 per cent, the highest proportion since the survey began in Q3 2016.
The proportion of investors stating that they would not need any investment services support rose sharply in Q4, from 28 per cent to 39 per cent. But regulatory reporting issues, such as those required under Solvency II and AIFMD, remain the most in-need service (28 per cent).
More than a third (38 per cent) of institutional investors believe their company will use more cross-border fund locations, with Ireland (45 per cent), Luxembourg (38 per cent) and Germany (24 per cent) 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,” says 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,” says Street.
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