Pimco: UK markets face months of uncertainty over Brexit

EU-Euro-Europe-Eurozone-700x450.jpgPimco says there is a 40 per cent chance that Brexit will occur, which could end in “an unpleasant divorce” of the UK from the European Union.

With a vote on Brexit expected in June or September this year, there is likely to be uncertainty for months to come in the UK markets, says Mike Amey, portfolio manager for sterling portfolios at PIMCO.

Amey says he assumes the UK will vote to remain in the EU, but if it leaves it sees two alternatives: a smooth separation with slow, tempered negotiations or a confrontational separation.

In the former situation the macroeconomic impact “should be smooth”, says Amey

However, a more confrontational separation could lead to a more long-lasting market response, the manager adds.

Those hit hardest will be large UK-listed companies that have significant exposure to European markets, while the pound will also come under pressure, says Amey.

“Contrary to some commentators, our sense is that this would be bullish for gilts as any hope of an interest rate rise is pushed yet further back.

“If there is any gilt market weakness, this should come through in longer-dated yields, where a higher risk premium may come into the real yield,” says Amey.

“The possibility of Britain exiting the EU – or ‘Brexit’ – has received considerable market focus over the last six weeks,” he says.

“In part, the narrative of heightened uncertainty over Britain’s relationship with the EU was always likely to gain more focus when markets were nervous about the possibility of a significant global slowdown. However, even if concerns over the global business cycle abate, the likelihood is that the “Brexit” referendum will continue to make headlines.”