'We Expect A Recession': Credit Suisse On UK Economy

Ric Deverell of Credit Suisse said in a research note Friday the United Kingdom's voting outcome to leave the European Union represents "the most significant pull back to-date from the post WWII consensus of closer integration and open trade."

However, the actual path forward is "not yet clear," but does pose "profound implications" for the UK. According to the analyst, one of the near-term implications is the country should enter a recession in the bottom half of 2016, and the central bank may undertake further easing policies.

"While this vote does not represent a systemic shock to the financial system on par with Lehman or a Greek departure from the euro, it does represent a powerful turning point," the analyst wrote. "The UK has taken a significant step back from globalization. That's a trend gaining political support across the west. Such a significant secular shift has the potential to have substantial implications for growth, corporate profits and asset prices in the medium term."

Related Link: Mohamed El-Erian On Playing The Market Post-Brexit: "Let The Dust Settle"

There are also "significant implications" for the European Union, specifically the analyst sees a slowing in economic growth while populist political parties from both the left and right could "raise the risk of further fragmentation" of the union.

Meanwhile, the direct impact of the Brexit vote will be "more muted" outside of Europe and attention will focus more closely on the upcoming U.S. election.

Here is a list of the analyst's recommendations across several income classes:

• Foreign Exchange: Expect the U.S. dollar rally to continue, but be careful of any central bank intervention.
• Fixed Income: Benchmark yields should rally further while Germany and Japan's government debt will "move further into uncharted negative territory." The UK's government debt will "eventually price for policy easing."
• Equity Market: The analyst's year-end FTSE 100 target was lowered to 6,200 from 6,600. He also lowered his S&P 500 year-end target to 2,000 from 2,150.
• Credit Market: The "panic" in the credit markets should last just a day or two.
• Emerging Markets: Emerging market assets will be hit as they represent risk assets, and a Brexit leave outcome will drag commodity prices lower — which in turn will cause emerging market assets to fall.