Three scenarios for post-Brexit markets

In the aftermath of the Brexit vote, Axa Investment Managers expects lower growth in the UK and slightly lower growth in Europe than previously forecast.

It believes the Bank of England will lower rates to zero and embark on quantitative easing (QE) in the second half of 2016.

In their new analysis, Axa have lowered the growth forecast for the UK to 1.5% in 2016 (previously the forecast was 1.9%) and to 0.4% at the end of 2017. They have also lowered the growth forecast for Europe to 1.5% in 2016 and 1.2% in 2017.

Meanwhile, uncertainty in Europe and the UK could lead the US Federal Reserve (Fed) to refrain from lifting rates across the Atlantic before December 2016.

Credit crunch possibility

In terms of asset allocation, they "keep an overall prudent stance" by being 'underweight' in equities and 'overweight' in credit. They suggest reducing eurozone and emerging European equities. Within fixed income, they have increased their exposure to US Treasuries.

However, while Axa believes that Europe will "muddle through", they have also analysed a more negative scenario, where political change could result from elections in France, Germany, Poland or Hungary, for example.

In addition, Scotland could call for a new referendum. Political risks could lead to a more drastic slowdown in the economy.

This scenario would lead to a credit crunch, but not another recession, according to Axa. "The economic outlook would not deteriorate as much as in 2012, as economic and institutional fundamentals are healthier than in the previous episode of the euro crisis."

In this scenario, the European Central Bank would provide more substantial QE. The Fed would refrain from hiking rates.

Axa add that the resulting depreciation of the euro might even compensate for weaker foreign demand. Further, the dollar would rise markedly on safe-haven flows of capital in.

A positive scenario

They have also analysed a more positive scenario, where a swift negotiation process could confirm that the UK attained a strong partnership with the EU.

In addition initiatives from core European countries could foster confidence about the future of the EU and political uncertainty would only be temporary.

As a result, consumer spending would remain a growth engine in the euro area and employment prospects would not called into question. Risk aversion would fade rapidly. Safe haven bond yields would rise back to pre-Brexit levels and equities would stage a temporary comeback.

Unfortunately, they do not deem this scenario to be very likely.

This article was originally published by our sister magazineMoney Observer here.

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