Sixty to seventy percent risk of UK recession. Market relief rallies likely to be shortlived says Russell

6th July 2016

Political and economic uncertainty following the outcome of the UK EU Referendum has significantly increased the chances of recession in the UK to around 60 t0 70 per cent, according to the Russell Investments Strategists.

The Strategists’ Q3 Global Outlook report, any relief rallies in the markets are likely to be fairly short and limited in scope. Increased political uncertainties for the UK both domestically and with the EU will act as a drag on both economic growth and financial market performance. The team has downgraded growth expectations and estimates a 60%–70% chance of recession during the next 18 months.

Wouter Sturkenboom, senior investment strategist, EMEA, Russell Investments, says: “In the UK, the fallout from Brexit has pulled our growth expectation for 2016 down from 1.5% to 1%, and for 2017 from 1.5% to 0%-0.5%. The drivers behind this downgrade include the direct impact from Brexit on trade and foreign investment, as well as the indirect impact on consumer and producer confidence. We expect the Bank of England to cut interest rates to support the economy at the margin.”

Increased uncertainty to present buying opportunities

“Volatility however often creates opportunity, although the shakeout so far has not been large enough for our process to recommend taking on more risk. We have therefore kept a broadly neutral allocation between equities and bonds since the equity rebound.

“Fixed income investors should continue to keep their expectations with respect to Gilt yields low, and our range for the 10-year Gilt yield at the end of 2016 is now 0.8%-1.4%, down from 1.5%-2.0%. There is little in terms of growth, inflation or monetary policy that is going to drive yields higher in a sustainable manner.”

2016 regional forecasts

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