‘Ottawa’ Braving Brexit: The view from Canada
Brexit caught the world by surprise as the citizens of the United Kingdom voted narrowly to leave the European Union (EU). On the eve of the referendum, markets warmed to early predictions that the “Remain” camp would emerge victorious. Just as quickly, markets reacted to news of the “Exit” victory with a major sell-off that sent stocks and sterling into sudden decline.
The bottom line for Canada? What happens in Britain doesn’t exactly stay in Britain, say financial experts at BlackRock Canada — but investors should be able to weather the fallout.
“While the full impact of Brexit is currently unknown, Canadian investors will definitely have to tread some choppy waters over the short run,” says Aubrey Basdeo, head of fixed income at BlackRock Canada.
As a small, open economy heavily dependent on trade, Basdeo says the combination of political uncertainty and potentially weaker global trade flows that stem from Brexit leave Canada in a vulnerable position.
In particular, it may mean relying on the already stretched sectors of housing and domestic consumption and less on exports and investments — sectors that the Bank of Canada is hoping will contribute more to the current expansion.
The British referendum’s fallout on global equity markets, meanwhile, has been more acutely felt in Europe and concentrated particularly in the European financials sector. Canadian stocks have sold off as well, notes Kurt Reiman, chief investment strategist at BlackRock Canada, but less so given the rally in gold prices, which has helped buoy shares in domestic gold miners and offset the negatives of lower oil prices on the energy sector.
“Given our outlook, we continue to focus on opportunities in dividend growth stocks, a quality orientation and lower volatility exposure amid elevated uncertainty and a global search for income,” Reiman says.
Brexit will also likely be a poke in the eye for the recovering Canadian dollar, although Basdeo sees sustained higher gold prices helping to mitigate some of that weakness and to keep the loonie trading in a narrow range of US74 cents to US77 cents.
“Brexit has so far resulted in a further surge in gold prices and a modest decline in oil prices,” he says. “That helps to explain the modest decline in the Canadian dollar despite the overwhelming rush into safe haven assets such as the U.S. dollar and Japanese yen.”
Outside Canada, the U.K. vote to leave the European Union is weighing on the decision making of global central banks including the U.S. Federal Reserve, which will now almost surely stand pat in July. But it’s still too early to determine what moves the Fed might make later this year, says Reiman. “That will depend critically on the data coming out of the U.S. economy over the next few months.”
The Bank of England, meanwhile, may need to cut its key lending rate, while the European Central Bank might be expected to lean toward further quantitative easing.
Perhaps the biggest long term implication of Brexit, however, is its potential influence on other European countries dissatisfied with EU membership.
Brexit could embolden other countries to flee the EU, says Reiman, leaving European leaders to fend off domestic populist movements to keep the European Union from falling apart.
A stronger European economy would probably go a long way in keeping the EU intact, Reiman adds, but there’s no sure bet that will happen any time soon given all of the monetary stimulus that has already been pumped into the system to little avail.
“This is a pivotal moment and perhaps the last opportunity for Europe to step up and create an environment that generates economic growth for its citizens,” he says.
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