Micro factors could trump macro after Brexit – JPMAM’s Flanders

Added 20th June 2016

While investors should be wary of macroeconomic factors impacting UK equities and sterling in the short term post-Brexit, the microeconomic consequences could be bigger in the long-term, according to Stephanie Flanders, JP Morgan Asset Management’s chief market strategist for Europe.

Micro factors could trump macro after Brexit – JPMAM’s Flanders

Flanders said it is nearly impossible for investors to nail down the precise nature of a post-Brexit landscape, but she asserted we can forecast some of the likely macroeconomic and microeconomic implications that would follow a leave victory.

Firstly, she predicted UK equities could see a further 2-3% sell-off and there would potentially be a further 10% fall in the trade-weighted value of sterling in the immediate aftermath of a Brexit.

Research compiled by JP Morgan Chase shows the UK economy losing 1 percentage point from the growth rate in the 12 months after Brexit, which is likely to send inflation upwards, said Flanders. At that point, the Bank of England would have to face what governor Mark Carney describes as a challenging trade-off between stabilising GDP growth and curbing inflation, Flanders said.  

“In the short term we believe the negative hit on the economy would dominate the monetary policy response. The first rate rise would likely be deferred even further into the future, and the chance of a rate cut or other stimulus measures in the UK would go up,” she said.

As for the longer term impact of leaving the EU, Flanders stressed that the microeconomic implications will trump the macroeconomic consequences.

“Investors should be especially alert to the outcome for UK financial services firms, many of which could be negatively affected. Manufacturers should benefit, at the margin, from the weaker currency. But uncertainty about the post-Brexit trading relationship will loom large for them too, and skill shortages could be a negative for some companies if inward migration from the EU is curtailed.”

The consequences would not be confined to the UK of course, Flanders noted. The EU would also likely endure a short-term hit post-Brexit, particularly countries with heavy reliance on trade with the UK, such as Ireland, Belgium and the Netherlands.

“JP Morgan Chase analysts see a hit to eurozone GDP on the order of 0.2-0.3 percentage points over 18 months following a Brexit vote,” Flanders said. “Eurozone inflation might well be slightly lower on this scenario, due to the greater strength of the euro against sterling. The reverse would be true in the UK.”

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