State Street Corporation launched the latest findings from its Brexometer Index, a quarterly pulse survey of institutional investor sentiment on the economic impact of Brexit.

The Q3 2018 survey indicates that the number of institutional investors looking to increase their holdings of UK assets rose to a record high of 21 percent, an eight percent increase from 13 percent in Q2 20182 and higher than the previous set record of 16 percent in Q3 20173.

In addition, despite a sharp decrease in positive outlook for the global economy between Q1 20184 and Q2 2018, when investors with a positive outlook dropped from 55 percent to 36 percent, sentiment has now risen to 43 percent. Consequently, the number of investors with a negative outlook for global economic growth fell to 15 percent, an eight percent drop from Q2 2018.

Aside from a more optimistic outlook, Q3 2018 saw a growing number of investors anticipating that Brexit would have a major impact on their business operating model, with 26 percent of respondents believing its impact would be “significant”, a 12 percent increase from Q2 2018. This is the highest score since the index began, although the overall proportion of investors anticipating any impact (83 percent) is lower than the record high of 87 percent set in Q1 2018.

Other key findings of the Q3 2018 index include:

• 40% of institutional investors believe asset owners will not change their levels of investment risk over the next three to five years, up 10% since Q2, 2018
• Regulatory reporting issues, such as those required under Solvency II and AIFMD, remain the most in-need service (28%) despite having fallen by nearly 10% since Q1 2018
• 17% of respondents believe fund restructuring is another area that businesses will need the greatest help with following Brexit, overtaking performance and risk analytics which fell to 8%
• More than a third (37%) of institutional investors believe their company will use more cross-border fund locations, with locations such as Luxembourg (57%) and Ireland (54%) listed as the most attractive for managers

“Investor sentiment toward UK assets is becoming increasing bifurcated as Brexit deadlines loom larger,” said Michael Metcalfe, head of Global Macro Strategy at State Street Global Markets. “On balance, the optimists, those planning to increase their holdings, are still winning the day – just. However, the Bank of England data released at the end of August – showing the largest drop in foreign holdings of Gilts since records began in 1982 – shows this may not be the case across all investor types.”

“The story of Brexit so far is that fears of economic disruption and capital flight have been unfounded and investors have been willing to give the UK the benefit the doubt. But the closer we get to the key Brexit deadlines without signs that a deal can be reached, the more likely it is these fears will become a reality that investors will need to adjust too,” continued Metcalfe.

“Sterling has remained under pressure, reflecting currency markets’ low expectations with respect to Brexit negotiations, with only a brief rally as interest rates were raised,” said Bill Street, head of investments for EMEA at State Street Global Advisors. “The extent of negative sentiment, combined with undervaluation, means that the currency tends to rally sharply on more positive news headlines.”

View the full Brexit research report to understand its economic impact.

Source: State Street