Brexit, what Brexit? Euro area portfolio exposures to the United Kingdom since the Brexit referendum

Abstract

We study euro area investors' portfolio adjustment since the Brexit referendum in terms of securities issued in the UK or denominated in pound sterling, in the context of heightened policy uncertainty surrounding the exit process of the UK from the EU. Our sector-level analysis ‘looks-through’ holdings of investment fund shares to gauge euro area sectors' full exposures. Our key finding is the absence of a negative ‘Brexit-effect’, rendering UK-issued and pound-denominated securities less attractive. Instead, we observe that all euro area sectors increased their absolute and relative exposures to UK-issued and pound-denominated debt securities since the Brexit referendum, as well as to listed shares issued by UK nonfinancial corporations, while the exposures to shares issued by UK banks declined. These findings should be seen against the backdrop of low yields on euro area debt securities and a strong recovery in UK share prices since the Brexit referendum.