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By Tyler Durden

While by now practically every bank has forecast how the market would react to a Brexit vote, either to say or leave, nobody has quite come as close to dramatic forecast revealed by Morgan Stanley analysts overnight. The bank, which after the sharp move in the polls to Leave has now raised the probability of a vote to Leave to 45%, predicts that MSCI Europe would see a 15-20% drop in a base case BREXIT scenario. This compares to a 5-10% rally if the UK votes to remain in the EU.

Here are the two cases as summarized for the Stoxx 50 and FTSE 100, based on whether Remain or Leave wins:

STOXX 50

• Base case index target range under Leave is 2400-2550.
• Rally up to 3150-3300 under Remain.

FTSE100

• Base case index target range under Leave is 5000-5300.
• Rally up to 6500-6800 under Remain

Below we present the full MS bull, base and bear case scenarios in the event of Brexit.

PE and EPS assumptions for MSCI Europe

Scenario framework for MSCI Europe in event of BREXIT

PE framework. MSCI Europe’s N12M PE is 14x today and has averaged 15x over the last 3M. This compares to our expectation of a 5-10% rally if the UK votes to remain in the EU. The median reading since 1987 is 12.9.

• Base case: We assume a 15% drop in N12M PE which would imply a move down to 12.8 from its L3M average.
• Bear case: A 20-25% drop in the N12M PE would imply a move down to c. 12x – still materially above the single-digit lows seen during 2011/12.

EPS framework. Historically, European earnings have generally declined by 30-40% during recessions, although their current depressed level suggests a similar outcome from here would be unlikely.

• Base case: We assume a 5-10% drop in EPS reflecting a slowing of economic activity and downward pressure on Financials profits (that still account for 30% of the market). FX weakness would be likely to provide some modest support to EPS over time. This assumption is smaller than the 11% decline in EPS seen during 2011-2012.
• Bear case: We assume 15-20% drop in EPS based on our economists’ forecast for deeper GDP slowdown under their ‘severe stress’ scenario

MSCI Europe

The base case view is of a vote for the UK to remain in the EU, and a resulting stock rally. In the tables below MS applies its expected price moves in bull, base and bear scenarios against the underlying index’s average price level over the last 3 months (note the numbers are virtually identical if compared versus L6M). For example:

• MSCI Europe is currently 4.5% below its L3M average.
  
• Hence, in the base case view that European equities would fall 15-20% under Brexit, this leaves a further 10.5% to 15.5% to go.
• This implies an index range of between 1070-1137 for MSCI Europe versus the current level of 1278. In the event of a vote to remain MS assumes a 5-10% relief rally. If this upside is applied against the L3M average then it implies upside of …read more

  Source: Morgan Stanley Expects Unprecedented Market Moves No Matter How Brexit Vote Goes

      

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  Posted June 17th, 2016 in Uncategorized.