Should a deal be struck, the MSCI expects a bounce in UK equities. But how much?
Both sterling and the UK stock market could be in for steeper declines should the UK opt to leave the European Union without a deal, according to a "stress test" study by the MSCI, the index provider.
Using analysis on the potential outcomes of Brexit outlined in the International Monetary Fund's World Economic Outlook, MSCI's paper looked at the potential outcome on markets of the UK’s exit from the EU both with and without a deal.
In the case of a no-deal, the study anticipates increasing tariff and non-tariff trade barriers on trade, potential border disruption and stricter immigration policies, all of which would have an adverse impact on economic growth.
MSCI notes that fears of these adverse effects of no-deal are already priced into the market. Even so, they expect no-deal would still result in a 15% drop for UK equities.
The UK, however, would not be the only market to be impacted. German equities, says MSCI, would fall by 5% in such a scenario, while the US market would drop by 3%.
In terms of the value of sterling it would fall by a further 10% against the dollar. The euro would also take a hit, falling by 5% against the dollar.
In the event of a deal being struck, however, MSCI anticipates a rebound in both equities and sterling. The authors of the study note:
"In such a case, our scenario envisions a (partial) reversal of what has been priced in over the past two years."
MSCI predicts a roughly 10% bounce in the UK stock market. Meanwhile, the German and US market would climb by 6% and 2% respectively.
Both sterling and euro would also see a boost, the former rising against the dollar 8% and the latter by 3%.
Following the UK's vote to leave the EU in 2016, both the value of sterling and the UK stock market plunged.
During the past three years of political drama, both have since swung back and forth, following changing expectations of how the UK may end up leaving the EU.
Sterling, however, is still around 17% cheaper than before the vote. The UK market has seen some recovery, albeit underperforming global markets.
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