Study into investor sentiment after the Brexit vote

The uncertainty surrounding Britain's membership of the European Union has had substantial consequences for the UK economy: Most notably, the pound recently hit a 31-year low against the dollar.

Alex Chase PhD
Author Alex Chase PhD
Date 28th October 2016

Brexit vote

Despite newspaper headlines featuring people balking at new prices in the local pub or panic-buying Marmite, most of us have probably not yet felt the effects of our potential Brexit.

Of course, the real economy isn’t only affected by prices, but also by psychology: If enough people decide to change their spending behaviour in the wake of the referendum, there will be measureable effects on economic growth. 

To see if we could detect the impact of Brexit on consumer confidence, we turned to data recently published from the British Election Study, a longitudinal panel survey coordinated by the Universities of Oxford, Nottingham, and Manchester. 

Participants in this survey were interviewed in the spring of 2016 (that is, before the June referendum), and then in the summer after the results had been declared. We focused on one question in particular:

"Do you think now is a good or a bad time for people to buy major household items (furniture, kitchen appliances, televisions, and things like that)?"

Only 19% of people said that now was a good time to make a major purchase, and around half of these people were consistent before and after the vote, whereas the other half only became optimistic afterwards. The other 81% said that it was either a bad time or they weren’t sure. The majority of these people were consistently pessimistic before and after the vote.

Study into investor sentiment after the Brexit vote

To put these numbers in context, we looked at the answers people gave to the same question at two time points in 2015. Back then, around 80% of people said they thought it was a good time for major purchases, so year-on-year we have seen a similarly sized majority flip from optimism to pessimism.

Although these numbers tell us something very interesting about the people who responded to the poll, what we really want to know is how investors will react to Brexit. To make predictions about this subset of the population, we fit a multilevel regression model that used various demographic variables, such household income and education level, to predict people's answers to the question about major purchases. We then identified a population of investors from the Wealth and Assets Survey, a panel study run by the Office of National Statistics, and fed the demographic data into our model to estimate whether or not investors would think it was a good time to make a major purchase. 

We found that the fraction of investors who were optimistic about making big purchases might be much lower than the rate in the original sample, probably between 5–10% instead of around 20%. 

Obviously investor confidence is much too complicated to be measured by a single question, but our analysis suggests a trend toward decreased optimism in response to Brexit. As our work continues, we'll focus on improving our model to better understand investor sentiment before and after the referendum, and we will be looking very closely for evidence about whether these sentiments manifest in risk preferences and investment decisions.

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