This document discusses the impact of Brexit on markets and risks. It shows that while investors were prepared for weakness in the British pound, the key question is whether they will maintain their UK asset holdings. European systemic risk spiked following Brexit, showing markets have become more fragile. Data so far shows investors are not becoming broadly more risk averse in response to Brexit, pointing to "no panic" for now. The document warns that uncertainty from Brexit could lead to a UK recession and discusses potential contagion risks to other European countries.

1. State Street Explains…
Five things to
know about Brexit

2. Investors React to Surprise Brexit Vote
The leave vote was a blow to investor confidence, but how big
a blow? Our investor behavior indicators show that investors
were prepared for sterling weakness, but the key quesDon is if
they will maintain their holdings of UK assets.
State Street Explains…
0%
25%
50%
75%
100%
Jan-13 Sep-13 May-14 Jan-15 Oct-15 Jun-16
UK equity flows Gilt flows GBP holdings
Investor Behavior Toward UK Assets
PercentileRank
Brexit
Source: State Street Global Markets

3. Systemic Risk* Is Back
European systemic risk had begun to normalize, but fall-out
from Brexit shows markets are once again fragile and
suscepDble to large drawdowns.
European Systemic Risk Has Spiked Following Brexit
StandardizeShiftinthe
SystemicRiskIndex
0.70
0.72
0.74
0.76
0.78
0.80
0.82
0.84
0.86
-4
-3
-2
-1
0
1
2
3
4
Jan-07 Nov-08 Oct-10 Sep-12 Jul-14 Jun-16
European systemic risk index standardised shift (z-score)
European systemic risk index level (rhs)
State Street Explains…
Brexit
Source: State Street Global Markets
*Risk of collapse of an enDre financial system or market
**Standard score
European systemic risk index standardized shiM (z-score**)
European systemic risk index level
SystemicRiskIndex

4. Post-Brexit Risk Aversion
With Brexit a reality, will investors heed the warnings of global
policymakers and take a more measured approach to
managing risk? Our data shows investors aren’t risk averse in
aggregate, poinDng to "no panic" for now.
Risk AppeFte Retreat?
-8
-6
-4
-2
0
2
4
6
8
Sep-15 Dec-15 Mar-16
Sentimentscore,20-dayrollingaverage
Multi-asset sentiment score Equity sentiment score Fixed income sentiment score
Investors adding to risk
Investors reducing risk
State Street Explains…
Brexit
Source: State Street Global Markets
*An aggregated value of senDment based on actual behavior
Sentimentscore*,20-dayrollingaverage
aftersentimentscore

5. UK Recession on the Horizon?
Forecasters warned that uncertainty created by Brexit could
lead to a recession. We’re closely monitoring our measure of
online prices.
PotenFal Impact of Brexit on Online Prices
96
97
98
99
100
101
-60 -30 0 30 60 90 120 150 180
Lehman/Brexit=100
Days before and after shock
US PriceStats around Lehman
UK PriceStats around Brexit
State Street Explains…
Brexit
Source: State Street Global Markets

6. Where to Worry Next
The Brexit vote could have repercussions across Europe. But
contagion is not guaranteed, as evident with the recent
elecDons in Spain.
NaFonal / AnF-establishment PoliFcal ParFes and NaFonal ElecFon Dates
Sources: ICM, Alco, TNS Poland/GW, IMOP, Sigma Dos, Ipsos, INA, EMG, YouGov
State Street Explains…
Brexit

7. For more informa+on, check out our Brexit page:
h7p://www.statestreet.com/ideas/ar+cles/brexit.html
Important InformaFon:
InvesDng involves risk, including the risk of loss of principal.
The informaDon provided does not consDtute investment advice and it
should not be relied on as such. It should not be considered a solicitaDon to buy
or an offer to sell a security. It does not take into account any investor's parDcular investment
objecDves, strategies, tax status or investment horizon. You should consult your tax and financial
advisor. All material has been obtained from sources believed to be reliable. InformaDon may
contain statements that could be considered forward looking, but outcomes may differ
materially from what is expressed. There is no representaDon or warranty as to the
accuracy of the informaDon and State Street shall have no liability for decisions
based on such informaDon.
CORP-2079 Exp. Date: 7/31/17