What are the long-term implications of Brexit on Canadian investors and where is the smart money going in this environment?
The response to the UK’s decision to leave the European Union last week has ranged from alarm to outright incredulity. The Leave vote caught most people by surprise, including, apparently, the Leave campaigners themselves. With the chance of a repeat vote already ruled out by David Cameron, Britain and the EU must now move to make the transition as painless as possible.
Terry Thib is vice-president of Investments at iA Clarington Investments. Although his business is focused primarily in North America, he confirms that the fallout from Brexit is being felt far beyond the power centres of London and Brussels.
“In the grand scheme of things, the UK is not massive in terms of global GDP, but this goes beyond the UK and Brexit,” says Thib. “The uncertainty this vote creates – it is kind of a wake-up call in terms of the political movement towards Euroscepticism. For decades we have been going down the path of globalisation and free trade, but people are now saying they want job security and a protectionist attitude is coming back.”
That shift in public opinion has made for a torrid few days with the markets, particularly in the UK and Europe, and unfortunately that volatility only looks set to continue in the near term.
“The markets hate uncertainty,” says Thib. “As this Eurosceptic movement gains strength and you see calls for referendums in Spain, Italy and France, as well as the support for Sanders and Trump in the US – what does this mean for global growth?”
He continues: “The European Union was one of the main centres for global growth we were expecting. We have to place a question mark after that right now. When there is uncertainty, corporations do not go forward with cap-ex plans or growth investments. Likewise people won’t spend when they are uncertain about their economic prospects.”
The vast majority of the investment community had warned voters of the implications of a Leave vote in the run-up to the referendum. Now that their warnings were ignored by the majority, life must go on, but what position is best for investors to take here in Canada?
“There is a flight to safety with the US dollar right now,’ says Thib. “The Fed is also something to consider. A rate hike was predicted for the back half of this year, but with Brexit and global uncertainty that will put the Fed on pause right now.”
The likelihood of the Fed maintaining its key rate also means that safer equities will be more and more popular heading forward.
“We have had very low interest rates for some time now and because of that yield stocks – pipelines, utilities, REITs, telecoms, will do well,” he says. “They are defensive, large cap in nature, and people move there in this type of environment. One of the largest funds I run –Canadian Conservative Equity Funds – about 65 per cent is invested in these type of securities.”
Energy, always a major concern in this country, is another area where the Brexit vote has proven detrimental. iA Clarington’s VP of Investments believes there is reason to believe oil & gas will bounce back, however.
“With the flight to safety with the US dollar, it does impact the demand for commodities,” he says. “Energy has been soft the past few days, but rebounded yesterday as the supply/demand fundamentals appear to be improving. So it goes back and forth. We are cautiously optimistic there.”
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