To Brexit or Not to Brexit

As anyone following Brexit knows, it is a mess. With the March 29, 2019 deadline for the United Kingdom to leave the European Union fast approaching, there is a real chance that no deal will be struck. British Prime Minister Teresa May is looking for a way to secure the votes needed in the House of Commons to approve the deal that she negotiated with the EU. This looks unlikely, which is why May pulled the vote back on December 11. Just days later, PM May faced a ‘no confidence’ vote (which she survived) that would have effectively ended her leadership. Frankly, the situation is changing so quickly that this whole blog might be out of date by the time I publish it.

As a provider of risk analysis software, one of the things that we do is create scenarios for certain stress events. With any risk scenario, the importance often lies in understanding the drivers that will impact portfolios. Since no one will ever correctly forecast all the factors impacting a scenario, the exercise of thinking about what might happen and how that will impact client portfolios is very important to positioning given these geopolitical events. Getting the stresses exactly right would be great too, but it is rare for anyone to forecast anything with high accuracy.

Before the June 23, 2016 Brexit vote we created a Brexit scenario that hypothesized that if the UK voted to leave the EU, the British Pound would decline 17% and property values would decrease 37%. We felt that the event would be short term in nature (less than 1 year) as the impact would be felt shortly after the vote and before the implications were really known. Implied in these stresses is that UK and EU area interest rates would fall along with global equity markets.


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