Brexit No Lehman to Europe Strategists Keeping Stock Calls

Would Brexit FX Moves Make Goods More Expensive?
  • Stoxx 600 to end the year at 358, Euro Stoxx 50 at 3,161
  • There will ‘almost certainly’ be opportunities, investor says

British secession from the European Union is a market scenario that the region’s equity strategists are choosing not to factor into their forecasts -- or at least, one they are expecting to have no catastrophic meaning for stocks.

Brexit Watch: The pound, the polls, and the probability of Brexit, all in one place

Even as global markets teetered last week and polls showed more U.K. voters leaning toward leaving the trading bloc, securities firms surveyed by Bloomberg are predicting the outcome will be largely a non-issue for equities. They’ve left practically untouched predictions that European shares will rise almost 10 percent from Friday’s close through the rest of the year.

While the stasis may reflect confidence, it’s more likely another sign of the futility that has plagued anyone trying to figure out European shares the past two years, a period in which they rallied to a record and then posted three of the worst quarters since the financial crisis. Yes, the threat of a British secession is real, but it follows episodes such as the Greek meltdown and sovereign-debt crisis that proved impossible to handicap.

“It’s difficult to make proper forecasts because we don’t have a proper market,” said Michael Ingram, a market analyst at BGC Partners in London. “Even if we get through this week with Brexit, the underlying problems will still be there. We’ve got record-low interest rates inflating equities, a reactive central bank. We are in uncharted territory.”

It’s been a year of disappointment for European bulls after 2015 ended with the worst December since 2002 and projections for a 10 percent annual gain in the Stoxx Europe 600 Index were slashed amid the biggest slumps ever seen at the start of a year. One measure of market stress posted its biggest six-day jump since August last week, and the region’s equities tumbled to their lowest levels since February.

Even as the U.K. vote approached and stocks fell, strategists surveyed this month kept their estimates for where the Stoxx 600 will finish the year at 358, about the same level as in May and compared with 325.78 at last week’s close. The Euro Stoxx 50 Index, which doesn’t include British shares or other non-euro denominated equities, will rally 11 percent to 3,161 from 2,849.17 last Friday, according to the average of 13 projections compiled by Bloomberg.

The Stoxx 600 rallied 3.7 percent on Monday on easing concern over a potential EU breakup. The MSCI All-Country World Index climbed 2 percent at 12 p.m. in New York.

Should Britons choose to part from Europe’s trade union in the June 23 referendum, the U.K. would have two years to negotiate its exit, and both the European Central Bank and Bank of England have said they’ll provide liquidity to markets. Ralf Zimmermann, a strategist at Bankhaus Lampe who estimates the Euro Stoxx 50 will climb 9.5 percent through December, says he’s not sure he’d rush to update his forecast if Britain were to leave. Markets will stabilize quickly as traders evaluate the potential impact, he says.

“The polls might be testing conviction, but the consensus still does not expect Brexit to happen,” Zimmermann said from Dusseldorf, in Germany. “Even if it does occur, nothing will change immediately -- this is not a Lehman shock.”

Since Lehman Brothers Holdings Inc.’s collapse that triggered the worst financial crisis in decades, divining what stocks will do has proved to be particularly challenging in Europe. Last year, optimism about ECB stimulus boosted the Stoxx 600 as much as 21 percent to a record in April, before the index gave up most of its gains as Greece came close to exiting the EU, China’s economic slowdown accelerated a rout in London miners, and Volkswagen AG lost almost 50 percent of its value amid an emissions-cheating scandal.

As the region went through a sovereign-debt crisis that forced countries such as Ireland and Spain to get bailed out, the Stoxx 600 became about 15 percent more volatile than the S&P 500 in the past five years. Since the 2009 low, the European gauge has climbed half as much as the U.S. index. Now, its valuation of about 14 times estimated earnings is near the lowest relative to the S&P 500 since the summer of 2012 -- back when ECB President Mario Draghi pledged to save the euro.

Some investors share the view that market panic would be contained if Britain were to leave. Andrew Belshaw, a money manager who helps oversee $436 billion for Western Asset Management in London, said the referendum won’t matter much for the U.K.’s economic long-term future. Pacific Investment Management Co.’s chief investment officer for global fixed income, Andrew Balls, doesn’t consider a Brexit to be a “systemic” issue, he said at a briefing this month.

“Long-term investors should be looking five to ten years ahead, rather than six to 12 months, and would do well to avoid viewing the EU referendum itself as the main driver,” said Colin Morton, a portfolio manager at Franklin Templeton Investments in Leeds, England. His firm manages $743 billion. Even in case of an exit, “there will almost certainly be an opportunity for long-term investors depending on just how far stocks fall.”

Read more about why Britain is having the referendum here.

Markus Herrmann, head of strategy research at Landesbank Baden-Wurttemberg, hasn’t changed his year-end target because he sees only a 30 percent chance that the U.K. will leave. Recent polls indicate 43 percent of the respondents favor an exit, while bookies place the odds of a secession at less than 40 percent.

“If Brexit does happen, forecasts will probably need to be adjusted, but it depends on whether it ends like a bad divorce or in a more moderate manner,” said Herrmann from Stuttgart, Germany. He expects the Euro Stoxx 50 to finish at 3,200 in December, 12 percent above the Friday close. “In a moderate scenario, discussions with the EU and U.K. could last quite some time. In a hard scenario, the EU could react harshly to scare off other countries from doing the same.”

The average strategist forecast still implies an about 2 percent decline for European equities in 2016. Amid concerns over the health of the global economy, the path of Federal Reserve interest-rate increases and the efficiency of the ECB’s stimulus, analysts have cut their profit-growth projections. They’re now calling for a 3.1 percent slide in earnings at Stoxx 600 companies, compared with forecasts for a 5.7 percent rise at the start of January.

“There are different factors that may drive consensus forecasts down, and temporary disruptions related to Brexit could be one of them,” said Gerhard Schwarz, head of equity strategy at Baader Bank AG. He still sees the Stoxx 600 ending the year at 340, or 4.4 percent higher than last week’s close. “If Britain does leave, potential side effects could trigger adjustments, but six months down the road investors will likely be more relaxed about the effects a Brexit will really have.”

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