European stocks could fall by as much as 10% if the UK Parliament rejects the Brexit deal with the European Union, according to MSCI..
Accompanying European stocks downwards would be UK stocks falling by 25% in the event of a ‘disorderly Brexit’, were the deal – which was due to be voted on in the UK Parliament this week, but has been delayed – to be rejected, the firm said.
Theresa May, UK Prime Minister, said on Monday she was “deferring” the vote.
Before the deferral, MSCI said it had stress-tested Brexit outcomes using Bank of England scenarios and its own modifications.
Gross domestic product (GDP) in the UK has been declining since mid-2017 and the UK equity market and sterling have been declining since the beginning of the year. GDP had originally grown on a quarterly year-on-year basis after the June 2016 referendum, while UK equities and sterling fell but recovered, until sliding again this year.
MSCI has previously predicted that UK GDP growth would decrease by 9% and the pound would weaken by 16% against the dollar and euro.
“The UK has underperformed other regions in terms of GDP growth, as well as in the equity and currency markets,” MSCI said. “However, the real impact – if Parliament says ‘no deal’ – has yet to materialise.”
Various scenarios MSCI tested with its RiskManager tool suggested a “significant” slowdown in the UK economy and large losses in its equity market and exchange rate. However, all major equity markets could fall.
A better-case scenario, which MSCI calls ‘disruptive Brexit’, could lead to losses about a third as large as the disorderly Brexit scenario.
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