He says credit markets are also starting to respond to the risk of ‘Brexit’ with the spread on GBP corporate credit increasing relative to euro-denominated credit.
“In our opinion, the transitional costs and uncertainty associated with ‘Brexit’ and heightened political risk premiums will have an adverse impact on European as well as UK assets in the event that the UK votes to leave the European Union on the 23 June,” Riley said.
He noted that while spreads on GBP company debt are typically wider than euro-denominated debt due to the greater depth and breadth of the European corporate bond market, since the middle of January spreads on GBP investment-grade-rated company bonds have increased by more than 40 basis points relative to euro-denominated corporate credit.
“The more than fifty percent increase in the GBP ‘credit premium’ has coincided with the weakening in the value of the pound versus the euro,” Riley explained. “We believe international investors are likely to be increasingly wary of sterling assets, including corporate credit, as the referendum approaches and if the opinion polls suggest that a vote to leave is likely.”
The chart below illustrates his point.
“We believe international investors are likely to be increasingly wary of sterling assets, including corporate credit, as the referendum approaches and if the opinion polls suggest that a vote to leave is likely,” Riley added.
