Brexometer CommentaryQ3 2018

There’s no shortage of news coverage and commentary regarding the June 2016

decision for the United Kingdom (UK) to leave the European Union (EU). While some

industry experts believe it could take up to 10 years for the UK to fully exit the EU,

short-term developments will impact overall market sentiment.

To help keep you informed of changes in industry perspectives, in November 2016,

we launched the State Street Brexometer, our quarterly survey that tracks investor

sentiment around Brexit developments. In conjunction with PollRight*, we’ve

conducted a survey of 101 professional institutional and alternative investors,

such as hedge funds, real estate and private equity**. The current research was

conducted between 27 July 2018 and 20 August 2018.

Results from this latest survey provide a benchmark view of the change of

sentiment around Brexit.

“Investor sentiment toward UK assets is becoming increasingly bifurcated as Brexit deadlines loom larger. The proportion of all investors expecting either to increase or decrease their holdings of UK assets in the next months rose substantially over Q3. On balance, the optimists, those planning to increase their holdings, are still winning the day — just.”

MICHAEL METCALFE Head of Global Macro Strategy at State Street Global Markets

State Street Brexometer

* PollRight is a market research agency specialising in business-to-business research.

**Countries covered by survey included UK, US, Europe, Central and South America, Middle East, Asia, Africa and Oceania.

What are your expectations of medium-term (three to five years) prospects for global economic growth?

Positive

Neutral

Negative

Don’t know

41.0%

15.0%

1.0%

Q3 2018101 Respondents

36.0%

39.0%

23.0%

2.0%

Q2 2018102 Respondents

43.0%

2

STATE STREET BREXOMETER

Summary of Findings

Uncertainty continues to surround Brexit, with a

no-deal scenario remaining a possibility. Q3 saw a

growing number of investors anticipating that Brexit

would have a major impact on their business operating

model, with 25.7% of respondents believing its impact

would be “significant”. This is the highest score since

the index began, although the overall proportion of

investors anticipating any impact (83.2%) is lower

than the record high score of 87.3% set in Q1 2018.

Appetite for increased holdings of UK assets rose

to the highest level since the index began, at 20.8%.

The previous high of 15.5% was set in Q3 2017.

However, the proportion of investors looking to decrease

their holdings of UK assets also rose, from 13.9% in Q2 to

19.8% in Q3. This is more in line with the historic average,

with Q2’s score notably lower than in previous quarters.

The positive outlook for the medium-term global

economic outlook bounced back in Q3, reaching 43%,

following a dip to 36% in Q2. Q1’s positive outlook of

54.9% remains a historic high. Negative sentiment

for the global outlook fell, from 23% to 15%.

Regulatory reporting issues, such as required under

Solvency II and AIFMD, remain the area that businesses

will need greatest help with following Brexit (28.1%).

This remains the most in-need service, despite having

fallen by nearly 10 percentage points since Q1 (37.3%).

Fund restructuring (16.9%), custody and accounting (12.4%)

and transition management (10.1%) are also areas investors

anticipate needing greater support with following Brexit.

The proportion of investors who believe that asset

owners will increase their level of investment risk over

the next three years fell for the second straight quarter,

falling below 25% (24.2%) for the first time since the

index began. Those anticipating a decrease (31.9%)

fell slightly from 34% in Q2, meaning that a growing

number of respondents believe that asset owners will

maintain their level of investment risk over the next

three to five years (from 29.9% in Q2 to 39.6% in Q3).

“Sterling has remained under pressure, reflecting currency markets’ low expectations with respect to Brexit negotiations, with only a brief rally as interest rates were raised. The extent of negative sentiment, combined with undervaluation, means that the currency tends to rally sharply on more positive news headlines.”

BILL STREET Head of Investments for EMEA at State Street Global Advisors

3

STATE STREET BREXOMETER

Other Highlights

The fund locations that investors believe will be most

attractive for managers looking to expand their cross-

border fund business are Luxembourg (57%) and Ireland

(53.8%). This is followed by the Channel Islands (24.7%),

Germany (20.4%) and France (14%).

Over the next three to five years, over a third (37.3%) of

investors believe that their company will use more cross-

border fund locations. The majority (54.2%) believe that

there will be no change in the current levels, while only

2.4% anticipate a decrease in the level of use of cross-

border fund locations.

State Street continues to work closely with regulators and

clients to prepare for the post-Brexit world. With our strong

presence in Europe and across the globe, and strength in

pan-European structures, we’re ready to partner with clients

to help them navigate complexity and address change.

For more State Street commentary on Brexit, please visit

www.statestreet.com.

What level of impact do you anticipate Brexit having on your business operating model?

Very significant impact

Significant impact

Moderate impact

Slight impact

Very slight impact

No impact

Don’t know

All significant impact

All impact

Q3 2018101 Respondents

2.0%

11.8%

23.5%

31.4%

11.8%

17.6%

2.0%

13.7%

80.4%

Q2 2018102 Respondents

6.9%

18.8%

17.8%

11.9%

13.9%

3.0%

25.7%

83.2%

27.7%

State Street Corporation State Street Financial Center One Lincoln Street Boston, Massachusetts 02111–2900

Important Information

Marketing Communication

All results come from the PollRight survey. PollRight and State Street are not affiliated.

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