Brexit: How much will prices fall and will central banks respond?

After the U.K.’s historic decision to leave the European Union (EU), Morgan Stanley evaluated asset classes in search of investment opportunities, insisting that the key questions were how much of a negative impact would be felt in asset prices and whether the European Central Bank (ECB) respond with policy measures.

These analysts noted that the vote for Brexit, as the decision to leave was termed, creates material political and economic uncertainty in Europe, in a note released to clients on Friday.

“Both are negative for risk premiums, and the question over the next several days is not whether prices fall, but by how much, and whether central banks respond,” these experts said.

In general terms, Morgan Stanley expects the pound to fall to $1.25-$1.30 and European equities to drop from between 15% to 20% from the levels seen at Thursday’s close.

As far as investment recommendations, the first said that “corporate and sovereign credit present the best opportunities to buy on weakness”, noting in particular ECB’s purchasing program for both.

Furthermore, Morgan Stanley noted that U.S. assets across the spectrum (stocks FX, credit and government bonds) would become “relative safe havens”.

“All eyes are now on the ECB, and how aggressively it decides to intervene in order to protect its member states and deflect downside risks to inflation that could result from increased economic uncertainty,” these experts concluded.

So far on Friday, the ECB had stated that it “stands ready to provide additional liquidity, if needed, in euro and foreign currencies.”

“The ECB has prepared for this contingency in close contact with the banks that it supervises and considers that the euro area banking system is resilient in terms of capital and liquidity,” the euro area central bank added.

The next regularly scheduled ECB meeting will take place on July 21.

Source: Investing.com