UK: Brexit hasn’t hurt one bit - Natixis

René Defossez, Research Analyst at Natixis, suggests that they have already pointed out that the Brexit referendum has not had the impact on the British economy that had been expected as the Q4 GDP grew by 0.7% quarter-on-quarter, more strongly than first estimated.

Key Quotes

“The UK is the G7 country with the most dynamic economy right now. At fiscal level, public sector net borrowing (PSNB) could reach £56bn for the current fiscal year, which would be £12bn less than expected by the Office for Budget Responsibility (OBR) back in November. The deterioration in the country’s fiscal situation, brought about by a slowdown in the economy and a change in the government’s fiscal policy, has not happened therefore.”

“In the foreign exchange market, 1-month implied volatility for the EUR/GBP soared to more than 25% in June. Since then, however, it has subsided, back to 8.4%, or below levels one year ago. Everything is happening as if the EUR/GBP has found a new equilibrium level. 1-month Risk Reversals indicate that the downward bias for sterling in the options market is no more. In fact, there have been several spells since December when it is the euro that presented a downward bias. The volatility displayed by the FTSE is less than it was one year ago (10.8% currently vs. between 20% and 30% in February 2016). In fact, volatility is currently lower than it has been since 2014.”

“As for British credit, it has retraced much of its underperformance midway through 2016. Corporate spreads and financials spreads (against swap) have pulled back comfortably below 200bp. As regards equities, the performance of the FTSE 100 over 1 year is one of the best when measured in local currency, with a gain of 22.26%.”

“All in all, sterling is the main victim of Britain’s EU exit. However, the currency’s effective exchange rate rebounded strongly in November and December. Since then, it has tended to stabilise. Furthermore, there is a silver lining to sterling’s depreciation: many exporters have taken advantage of this to increase their market share abroad, which is clearly reflected in the Q4 national accounts.”

“Does this mean that Brexit is a non-event for the markets? Certainly not. This signifies merely that the referendum did not trigger the violent shock that had been expected. In other words, the bad news lie ahead, even though in the short term the British economy is proving surprisingly resilient. When Article 50 is triggered, investor “enthusiasm” for British assets could wane.”