Potential Brexit market effect

10 June, AtoZForex – Lots have been said about the potentially disastrous effect of “Brexit”, that is a UK exit from the European union. Speaking specifically about the likely effect on markets, a study by risk modeling company Axioma shows that UK stocks could lose as much as a quarter of their value in the event of a Brexit.

The pound is already feeling the brunt, as it plunged across board again on Friday after new poll results showed the “out” camp still in the lead in the buildup to the June 23 EU referendum. The pound has become increasingly volatile and is expected to stay this way until the due date.

Brexit market effect

Having conducted a “stress test” of a hypothetical portfolio made up of stocks (60%) and bonds (40%), Bill Morokoff, head of research at Axiom concluded that “there would be a market turmoil.”

“Based on the stress test scenario, we expect a drop of 24% in U.K. equities over two to three months,” he said.

Morokoff further clarified that such a market effect could erase hundreds of billions off the value of pensions and other investment funds. As European stocks could fall by about 20%. The ripple effect will also be felt on Wall Street.

“There is a strong correlation with U.S. markets, so we could see an impact there too,” he added.

Stress test

The Axioma stress test was conducted based on precedented responses to big shock events in the past in a bid to forecast the Brexit market effect. Like the 2009 European debt crisis and “Black Wednesday” in 1992, when the pound crashed out of Europe’s system of fixed exchange rates, the precursor to the euro.

So far, the pound has been the major responder to poll results in the buildup to the referendum. Weakening against most of its major counterparts. However, the U.K. stock market, by contrast, has remained relatively calm. One way to look at it is that the fall in the value of the pound may have helped support the stock market since the cheaper pound makes British stocks cheaper for foreign investors to buy.

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